Pundits, bloggers, experts, etc... have been calling for a Treasury sell-off going on 3-4 years now (here is a post of mine from January 2009 on that exact subject.... and one from October 2010...and one from January 2012) so it is no surprise that the recent sell-off has brought the bears back out.

Bloomberg details the latest from the Fed:

Chairman Ben S. Bernanke said the Federal Reserve is considering additional asset purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014.

Policy makers are “prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate."

I feel like a broken record, but once again the mainstream media and fear-mongering finance blogs get the Chinese Treasury holdings data wrong. Here's Zero Hedge:

Today's TIC data confirmed what Zero Hedge readers have now known for quite some time: namely that foreigners are selling US paper. And while we have used contemporaneous Custody Account data from the Fed to present that in the past 7 weeks foreigners have sold a record amount of bonds, we now get confirmation via TIC that in November the selling continued, especially at the biggest non-Fed holder of US paper, China, which saw its holdings down to $1,132.6 billion, the lowest in the past year.

The WSJ reports on the Treasury Rally that Won't Die:

According to investment-research firm Morningstar, a portfolio of U.S. Treasurys with an average maturity of 20 years—the quintessential safe haven—rose 28% last year, even better than its 26% jump in 2008. You would have to go back to 1995 to find a better year.

More confusing still: Last year's surge came in the 30th year of a historic rally. Since 1981, long-term Treasury bonds have returned 11.03% annually, 0.05 percentage point better than the Standard & Poor's 500-stock index.

With almost each Treasury holdings release, the mainstream media claims China is selling Treasuries, when in reality purchases are just flowing through the United Kingdom (and are later revised to China... see here, here, and here for a few examples). So, not a surprise when I read this via the AP:

Reuters details:

Treasury debt prices rose on Friday, taking benchmark yields to the lowest in at least 60 years as investors looked for a safe haven on revived worries a European debt crisis could have a significant global impact.

Note the "at least" 60 years. The chart below shows the ten year Treasury yield over the last 110 years combining monthly data from Irrational Exuberance and daily data from the Federal Reserve once available.

The 1.91% reached today appears to possibly have been, a new all-time low (assuming there was no intra-month low pre-1962 lower than the end of month print).

The WSJ details:

Private foreign investors sold a record amount of U.S. Treasurys in June as the U.S. debt-ceiling debate intensified.

While it may be easy to blame selling on the debt ceiling issue, that really wasn't an issue until July. The broader selling likely occurred due to issues that were unrelated to the debt ceiling (supply of debt coming to market, the end of the QEII program, expectations for decent global growth).

That said, the scale of the actual selling is interesting (back to the WSJ).

Private foreign net purchases of long-term Treasury bonds and notes fell by $18.3 billion in June, following a $16.4 billion increase in May, according to the monthly Treasury International Capital report, known as TIC. The previous record drop was set in June 2000, when private foreign investors sold $16.5 billion in Treasuries.

Sales were concentrated in the Caribbean (i.e. insurers / private wealth). The way I would interpret this is that these investors sold Treasuries UNTIL the debt ceiling issue, which combined with concerns over Europe caused the flight back into Treasuries (i.e. if there was no debt ceiling issues, there would have been less demand in July / August).

Immune to this whipsaw was China.

China's holdings actually rose in June, by $5.7 billion to $1.166 trillion, following net buying of $7.3 billion in May. Analysts caution the data may not reflect the full spectrum of China's activity in the market, however. The Treasury recently adjusted its estimate of China's holdings based on use of proxies in other countries.

The below shows the combined purchases by China (direct) and the UK (where China purchases indirectly).



Until something drastically changes, expect a continued rise in the above chart regardless of net purchases / sales from other foreign entities.

Source: Treasury

The chart below shows the ten year Treasury yield over the last 100 years combining monthly data from Irrational Exuberance and daily data from the Federal Reserve once available. 17 more basis points away from the all time low of 1.95 (that was a monthly print... not sure how low it got intra-month).

As ten year yields re-approach 2.7% levels, let us revisit (i.e. pat myself on the back for) a post from last September when yields were 2.7%.

I'm reminded of the quote "Cleanest dirty shirt". Bloomberg details:

China, the largest foreign owner of U.S. government debt, added to its holdings for the first time in six months in April as economic data weakened and the Federal Reserve signaled no extension of its $600 billion purchase plan.

Chinese officials, as well as those in Germany and Brazil had been critical of the Fed’s asset purchase plan when it was first announced in November, said the proposal would be inflationary and could hurt the value of dollar-denominated assets. The Fed became the largest owner of Treasuries through what has become known as its policy of quantitative easing, in which bonds were bought to add cash into the economy and reduce the risk of deflation. The purchases end this month.

Also of note (and outlined previously at EconomPic here):

Even with the increase, the data “underestimates what China’s buying,” said Scott Sherman, an interest-rate strategist at Credit Suisse Group AG in New York, a primary dealer. “China deals through foreign intermediaries” leading to initial tallies counting their purchases as belonging to other holders, such as the U.K.

Hence the China and United Kingdom aggregation below.



Source: Treasury

Back in February of last year I detailed that China was NOT selling Treasuries when the "experts" in the media said they were. TIC December 2009 data initially stated Chinese holdings totalled a bit more than $700 billion, down from summer '09 levels. I made the case that these purchases were actually being made through the United Kingdom (more here). They were. The result is that China's December 2009 holdings were revised upward by $200 billion.

"Experts" in the media would have learned their lesson by now right?

To the Financial Times:

China and Russia were the major sellers of US Treasuries in November as bond yields surged sharply higher that month, according to the latest government data.

The US Treasury reported on Tuesday that private investors sought more dollar-denominated stocks and bonds in November than October, offsetting record sales by foreign governments.

The FT was joined by the WSJ, CNN, and Marketwatch amongst others getting it wrong. Bloomberg got it right here, but wrong here.

Facts:

1) Journalist do not read EconomPic
2) China is NOT selling Treasuries



Source: Treasury

On September 21st, the FOMC signalled a new round of quantitative easing with the following:

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

An interesting theory from James Bianco (via The Big Picture) as to why we perhaps shouldn't be surprised that the positive impact of QEII has been outside the Treasury bond market (even though they are targeting $600-$900 billion in Treasury purchases).

Over the last several weeks we have repeatedly mentioned the Federal Reserve’s portfolio balance theory. In a nutshell, this theory states it does not matter what securities the Federal Reserve buys with newly printed money (QE2). The market will arbitrage this new money into the market that it thinks will have the most impact.

With that theory in mind, lets take a look at one relationship that seems to have diverged since the announcment of QEII... the rather strong relationship (outlined here) between gold and Treasuries.



Source: Yahoo

Below is a chart of the 10 year Treasury yield and what the market is pricing in for the 10 year yield, ten years forward (along with the five year average of each).



What we see is that the current yield is well below the five year average (bringing up concerns there is a "bond bubble"), but we can also clearly see that the market is already pricing in the yield to rise to a level that is higher than its five year average in ten years.

Quantitative Easing II that is. The WSJ details:

The Treasury market delivered a vote of confidence to the Federal Reserve Wednesday as the price of the 30-year bond plummeted, a signal the market believes the Fed's big bond buying will eventually spur inflation.

"The market appears to be pricing in the likelihood that [quantitative easing] will eventually succeed, and is positioning itself ahead of the inflation that may materialize in years ahead as a result of a successful reflation program," said Kevin Giddis, president of fixed income capital markets at Morgan Keegan + Co. in Memphis.

Source: WSJ

Maybe they don't heart Treasuries, but with a soaring trade deficit they don't have much of a choice if they want to keep the Yuan cheap. The FT details the broader demand for Treasuries:

Foreign investors scooped a near record amount of US debt in August and sharply increased their holdings of Treasury bonds, according to the latest Treasury International Capital report.

August was marked by fears that the US economy faced a possible double dip recession and yields on Treasury bonds fell sharply as bond investors priced in a move by the Federal Reserve to start another round of quantitative easing. The Fed announced in August that it would start reinvesting principal payments from its agency debt and agency mortgage-backed securities in longer-term Treasury securities.

And China is by far the biggest foreign buyer. Over the last 12 months, China has purchased more than 40% of the marginal increase in foreign Treasury holdings assuming that purchases of the United Kingdom are in fact simply Chinese purchases (see here for more on why the bulk of the UK jump is in fact Chinese purchases).



Source: Treasury

Peter Boockvar (via The Big Picture) doesn't read EconomPic:

Reuters details:

U.S. Treasuries prices fell sharply on Friday after Federal Reserve Chairman Ben Bernanke signaled no new bond buying by the U.S. central bank was imminent, triggering the biggest sell-off in three months.

Although Bernanke did mention such purchases as a possibility, investors found nothing in his comments to indicate the Fed has any immediate plans to stimulate the slowing economy through an expansion of current bond buying.

For a market already at rich levels, this was an important nuance that further fueled a sell-off ignited after data earlier on Friday showed a revised picture of U.S. economic growth was not quite as weak as expected in the second quarter.