“You ain’t a beauty but hey you’re alright”

Foreigners in March finally got interested again in US notes and bonds. Buying totaled a net $24.39b, the most since March of last year and follows a steady stream of selling that saw net liquidations of $326b in 2016 and $20.5b in the first two months of this year. This follows net selling of $20.3b in 2015. Most of the swing came from the Japanese who stepped up with $31.2b of buying of notes and bonds after 7 straight months of selling. The Chinese were net sellers of notes and bonds but still increased their total holdings of US Treasuries by $28b due to the purchases of short term bills which is really only a short term parking of cash. Russia also added to its holdings by the most since 2014.

Bottom line, while March began with the 10 yr yield at 2.39% and ended at 2.39%, intra month the yield did spike to 2.63% in the heart of the reflation Trumponomics trade. Maybe the selloff mid month was enough to bring back foreign buying. Of note too, it got cheaper to hedge out the US dollar exposure for yen based buyers as the yen cross currency basis swap went from -45 bps to -33 bps. It got as expensive as -90 bps last November. So far the large amount of foreign selling hasn’t mattered since the end of 2014 in part because of Fed QE reinvestments, the blind search for yield from many and an economy that really can’t break out of its 2% growth range. Thus, a real test will be, assuming foreign selling continues to be the trend scenario, what happens when the Fed begins quantitative tightening after another few rate hikes (assuming they follow thru) and whether Trumponomics can overcome that. I’ll add to that all the Treasury supply that is going to be building in the years to come as we approach again $1 Trillion budget deficits. Interesting times.

For more on my views on treasuries see today’s Investment Ideas update.

 

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