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Bond bears could get their payday--China

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As the US bond market sells off due to the Fed's shrinking of the balance sheet, China announces that they will reduce or stop the purchase of US treasuries. At least in part, this is because they're not happy with the direction of US trade policies.

 

Just a blip or has the long anticipated bond bear market begun? More expensive mortgages and the inability to write off the interest could make for some interesting times ahead.

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Bloomberg says: 

“If China ceases to be a net purchaser of U.S. Treasuries, this is unlikely to have a significant impact on the overall yield curve unless China divests a large share of its total holdings in a short time period,” said Rajiv Biswas, Singapore-based chief Asia-Pacific economist at IHS Markit.

 

Yields were already climbing this week amid expectations the improving global economy will boost inflation pressures round the world, just as major central banks scale back their asset purchases.

 

Markets are also braced for a deluge of debt supply this week. The U.S. is scheduled to reopen $20 billion of 10-year debt Wednesday, followed by $12 billion of 30-year bonds Thursday. Germany sold 4.03 billion euros of 0.5 percent 10-year bonds Wednesday with syndications in Italy and Portugal to follow.

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Global economy is moving along nicely.

Commodity prices are rising with a pick up in demand.

Brent crude has risen from a low of $45pbbl  in June to $69 today.

Copper has risen from $250 in May to $325 today. 

Inflation expectations are rising in all quarters. TIPS activity is rising. 

 

Is it any wonder that rates are rising? Add in some supply:demand concerns from Fed or China and you could have a sell off. 

 

But a bear market, not yet. 

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I highly doubt China would unload a bunch at once. That hurts everybody, including them. Thing is that there is a lot of pressure on bonds right now. Debt will likely get more expensive both private and government. It may mean very little to the economy or it could be a buzzkill, especially for housing with mortgage interest deductions also being a factor.

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I won't pretend to understand much when it comes to investments. 

That said, echos of "short the market" ring loudly here. 

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Quote

Bill Gross, manager of the Janus Henderson Global Unconstrained Bond, wrote earlier this month that "tax cuts and increasing budget deficits" will boost inflation. He told Bloomberg last week that he's betting against bonds because he thinks a bear market has begun.

 

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Go find Ray Dalio interview with Bloomberg TV from Davos last week. Man is spot on about bond yields rising due to stronger than expected growth and a Fed that will have to raise rates faster and more than expected. 

 

Well worth the ten minutes. Trust me. 

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1 hour ago, tomkaz said:

Go find Ray Dalio interview with Bloomberg TV from Davos last week. Man is spot on about bond yields rising due to stronger than expected growth and a Fed that will have to raise rates faster and more than expected. 

 

Well worth the ten minutes. Trust me. 

Is that the piece that spells out the net increase in ust bonds in 2018?   Think net was 1.4 trillion vs couple hundred billion yoy 

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1 min ago, The Dude said:

Ten year at 2.83% this morning! Bonds are definitely in a short term bear market. Been waiting for this run to take some interest rate risk off the table. 

2.85% right now. The 12month forward contract for 6 and 12 month Treasury yields have been rising for two weeks faster than the comparable cash yields. Market is adjusting its view of rates over 2018.

 

Sorry, but This has nothing to do with China, it is about stronger growth outlook. Atlanta Fed forward-looking GDP predictor index suggesting 1q2018 GDP at +5.4%. Even from my view thst feels way too high but anything over 4% is going to crush several market narratives. 

 

Watch the Dalio interview. 

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