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Asian News and Rumors Spark Bond Market Selloff, Yields Threaten Key Technicals, Auction Stabilizes Market

First off(rumors and expectations): The selloff started with the Bank of Japan’s unexpected move to reduce their purchases of their bonds rekindled the “taking away the punch bowl” narrative as the world’s central banks wind down the post-crash stimulus (as we approach the 10 year anniversary of the Lehman bankruptcy). As usual, the market reaction was magnified by the unexpectedness of the announcement.  The US Fed stopped buying bonds long ago and the ECB has assured markets that their wind down will be well telegraphed.  So the mini “taper tantrum” gained steam as Bloomberg reported that China is considering slowing down or even stopping their purchases of US Treasuries.  Note that China is the largest owner of US debt.  The fact that the report was not refuted by officials or insiders gave it legitimacy and the sell off was on.  The 10 year T hit 2.60% today, up 15 bps since last Friday.  The China stance is complicated and multi-faceted: (1)  China is the largest holder of Treasuries (approx. $1.2 Trillion) and illiquidity in the market can devalue their portfolio; (2) Major trade decisions on aluminum, steel and other commodities by the US are pending, this could be a “warning shot” against potential tariffs; (3) Destabilizing the US Economy would not help China’s export business, increasing interest rates lessens US consumer buying power.  As yields rose, markets pondered the “unthinkable”: China selling Treasuries as our Fed trims its balance sheet (also selling Treasuries) as tax cuts and growing entitlement obligations balloon the deficit and increase supply into a marketplace of dwindling demand.  The 10 year yield fell short of its key technical, the March 2017 recent high of 2.63%.  Then an actual auction calmed markets (for now) as $20 billion of 10 year notes were well received as buyers were attracted to the higher yields, the 10 year dropped to 2.55%.  Now, all eyes are on Friday’s CPI reports for signs of inflation. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners