This week has seen the largest weekly issuance of Treasuries on record. There was $104 billion of new debt in 2, 5 and 7 yr tranches.
Now, the market has been weak in recent weeks, with the 10 yr yield moving back to the 4% level, but then on the back of a downbeat economic forecast from the World Banks, reiteration of no inflation in the immediate future and various well timed factors, and plenty of unwinding of shorts prior to FOMC, the yield came in again. One of the things that has given a great deal of comfort to the markets has been the high proportion of foreign buyers in the auctions. But, as I have said before, I have been suspicious of the description, of "indirect bidders, the group that includes foreign central banks", which seemed a bit, well, vague shall we say. So here is this from the WSJ.
"But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners.
The new definitions are deep in the arcane world of Treasury auctions. The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before. Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher."
http://online.wsj.com/article/SB124588934703850877.html
So, let me say plainly what I think is happening - the Fed is buying larger amounts than officially stated.
We know they would like to do more QE, but the Chinese are threatening to dump their holdings and the markets assume QE = inflation, so it has the reverse effect intended and causes yields to go up. So, I suspect they have found some clever ruse to stabilise prices, and get those inflationary juices flowing before the bond market wises up.
What is the consequence for the market? Well, in my view this should logically cause Treasuries to sell off and more so the Dollar, suggesting upside for precious metals. The trouble is, the Pavlovian reaction of the market making traders is to run for both of these assets at the first sign of trouble, so it would…
