Wednesday, February 17, 2010

TIC-ed Off

Another day, another bout of troubling news on Greece- the German business lobby is now calling for Greece to lose all EU voting priviliges until they sort themselves out, and Martin Feldstein is calling for a cheeky tactical exit and 30% currency realignment. Dr. Feldstein is almost certainly displaying a bit of naivete in his apparent belief that both the market and the rest of the EU would allow Greece back into the monetary union after a simple step reval.

Really, it's hard not to have sympathy with the belligerent stance of taxpayers in EMU anchor nations; Greece has pretty clearly abrogated the "social contract" of EMU membership with its cavalier tax collection and lush transfer payment policies; regardless of how this specific episode plays out, the lack of an enforcement mechanism on the fiscal behaviours of member nations represents a significant flaw in the project of monetary union.

Fortunately for the Greeks, at least some of the focus on "sovereign risk" has been diverted to bigger fish, courtesy of yesterday's TIC data in the US. This data is dangerously opaque and limited at the best of times, capturing as it does only a partial snapshot of capital flows; in a Setser-less world, it has become increasingly difficult to "follow the money."

Yesterday's TIC data was a case in point. China's holdings of US Treasury securities fell sharply, prompting reports that Voldy and the Death Eaters were dumping US bonds (perhaps as a geopolitical warning shot?) and the usual hand wringing press reports. You can see the decline in China's UST holdings below. Uh-oh, right?

Not so fast, my friend. That decline in China's US Treasury holdings wasn't a sale at all; it was simply the maturation of a slew of bills, many of which were no doubt purchased in the huge run-up of China's holdings a year earlier. The proceeds from the maturing bills would have been left on deposit, which isn't captured in the TIC data; as such, that bill roll-off simply represents a change in the assets captured in the data. Looking at the performance of Treasury bills since late November, it certainly doesn't seem as if the US Treasury has had much trouble flogging paper since China's "earth-shattering" decision.

Amusingly, despite the provocative headlines, China was actually a modest net buyer of Treasuries in December...and they had plenty of company. Net foreign purchases of Treasury bonds and notes totalled nearly $70 billion, down: down, in fairness, from November's $117.88 bio, but still the fourth highest month for foreign Treasury buying on record. Perhaps the financial press should hire Frank Drebben to report on the TIC.
Not that this means that either Treasuries or the dollar are bullet-proof, of course; Macro Man continues to like being short the "QE withdrawal" bonds markets against those that won't have to experience the dubious pleasures of cold turkey this year.

The dollar, meanwhile, has at least temporarily re-asserted its link with equities, as the DXY followed yesterday's strong "synthetic Monday" showing by breaking its one month trendline.
Insofar as we might reasonably expect a moratorium on real news out of Greece for a bit, it would not be unreasonable to expect a bit more of a bounce in the euro and other "risky" currencies. Until the EU decides what to do about its unrepentant black sheep, however, it would seem that short-covering rallies in the euro might represent little more than a selling opportunity.


spagetti said...

re "QE withdrawal" bonds.. Gilts look like the best short to me. they are even behaving a bit sickly. to me its beginning to have a bit of an EM bond mkt feeling when poor data translates into fears of fiscal sustainability

anyone else has the feeling that maybe a China reval is closer than we think ? perhaps with the start of the new lunar year ?
and I dont like Jim O'Neil but he might be onto something here..

Rossco said...

spagetti - if i were Chinese and in the yuan revaluation department, recent Euro weakness would give me a lot of cause for concern as to whether to pull the trigger just no

spagetti said...

Rossco.. fair point.
but i still think its worth making a small bet on this happening in the next 1week to 1 month

Nic Barnes said...

I agree that gilts could be the best QE short:
Sterling does not have reserve currency status (like the USD, even if long-term that is unwise)
Gilts are not the international flight to quality assets others perceive in USTs.
UK pension funds might not be the buyer they have in past - the UK db pension fund deficit (on a PPF measure which is the backstop trustees have to keep in mind) is now negligible. If you want do do the equity gilt switch you could have done it by now.
Banks might not be the buyers of gilts they have been as they shrink their balance sheets (and why do they need long-dated bonds as capital - duration is a risk too)
As sterling weakens, the necessity for the MPC to do QE reduces: the QE back-stop is removed. Could we see weak sterling leading to a sell-off in gilts?
If Greece were not in EMU that would be the scenario for them.
At least it would get some of their competitiveness back from Germany.
But western currencies need to weaken 10s of % before they become competitive versus EM currencies. Western currencies cannot just competitively weaken versus each other - that is not where the problem lies.
For the record - my largest currency position is short GBP into SGD and my largest bond position is a short to gilts.

Anonymous said...

a reval makes less sense than ever now.

it's one thing to want to slow down the volume of credit flowing to (certainly)local governments/infrastructure projects and (alledgedly) the stock market/commodity stockpiles, but the chinese still desperately need the world to buy their output, in size. as world demand has not decisively turned the corner, now is not the time to start increasing prices.

sounds illogical? only if we apply the logic of a western market


Anonymous said...

ps have to agree with nic. sometimes the consensus/obvious trade is the right trade.

nervous times though when merv warned that further qe could be forthcoming! although that would probably roast the currency

Steve said...

On bonds, I think the yield curve is just too steep to allow yields to rise much further. Real rates have already skyrocketed to the point where, given absolute yields, they are certainly not expensive. For banks they're a dream, a great place to put all that cash to work and no need to provision for them. In the US the 10-year gives about 0.01 in price per trading day in rolldown alone, not to mention 3.50% positive carry.

Steve said...

...and Japan didn't have reserve currency status, and their 10-year has been sub-2% for 12 years and counting.

Steve said...

3's a charm--I'd be interested to know MM and others' thoughts on the rally yesterday. I am attributing it to the growing problems of the Dems, and on reports that the stimulus funds will really kick in now, the pre-midterm boost.

Anonymous said...

''...Jim O'Neil (..)might be onto something here..''

Can you let us know where we find that 'here' ?


Rossco said...

@melki & spagetti

maybe the point of all the commodity stockpiling has been to get stocked ahead of a Yuan DE-VALUATION..... now that would really get a cat amongst the pigeons

spagetti said...

my very reliable counter indicator on credit and rates has just bought some UK Gilts (and he is already short protection)

its my boss..

Macro Man said...

Re: China, I tend to agree with Rossco (and my own non-prediction): it's not clear to me why they reval against the $ when the RMB is strengthening against the EUR, particularly when there were more obvious times to do so over the past year.

Re bonds/gilts etc: I agree that Gilts (and UST) look rich against non-QE bonds markets, though I believe the point of the Gilt curve deliverable into the future is actually quite cheap agaisnt the rest of the Gilt curve, so that is a bit of a risk I suppose.

The US curve trade will be interesting to watch. Putting on the flattener doesn't incur the same cost of carry penalty for real money as it does for HF (since they are using, well, real money, as opposed to borrowed funds), so they should be the first to put the trade on. At this juncture, I've heard no anecdotal eveidence that they are doing so. While I can intuitively see the appeal of the flattener, for a leveraged punter the cost of carry just seems to be too expensive at the moment, at least in swap space.

Anonymous said...

Does anyone have a good handle on how many gilts UK commercial banks will need to buy if the BIS type liquidity rules actually come into force? This is my one concern is selling the long end but not getting very clear answers

Anonymous said...

good question anon. JPM reckon about £20bio this year and £150bio in total, but the banks have got a few years to achieve full implementation.

if memory serves, their strat guy had 10y gilts-bunds going to 100+ - from 80ish now.


Steve said...

Aren't you bond bears feeling a little crowded? MM is it time for a little Macro Poll? I bet the bears outnumber the bulls 5:1

leftback said...

Shorting JGBs after the Japanese real estate collapse was a losing trade for many long years... I really can see the counter-arguments to this (Japan was a nation of savers, UK and US have responded with earlier and larger QE than Japan did), yet the experimental data are in front of us. Japanese investors sold stocks and bought JGBs.

The real risk in shorting govies is a return of the credit crunch before a genuine recovery takes hold - spreads widening in high yield bonds, EM bonds (you can add submerging market bonds like Greece and Spain, and maybe add distressed US state and muni bonds to that) or a meltdown in equities.

At this point a 5% rally in the dollar is all it would take to unwind a lot of commodity trades. We all know how much leverage remains on a lot of risk trades.. right? Enough people (Soros, for one) were burned shorting USTs in 2008 that there may not be a rush into this trade, not while the recoveryless recovery continues in the US.

Bob_in_MA said...

I also doubt a near-term China revaluation is near. First, I think they are trying other methods of increasing consumption, like raising wages.

Second, I think the powers-that-be in China are a lot more concerned about the potential for a crash than Jim O'Neil and the other Kool-Aid drinkers. Things like, the looming problem of local debt.

leftback said...

Bye-bye low volume equities rally.
Bye-bye Euro short covering.

Jim O'Neil gets paid a bonus by GS whatever happens to the Kool-Aid drinkers.

k1 said...

LB (or anyone, actually) - I'm looking for a pointer to good quality data on US saving behaviour. I've recently seen disagreements back and forth about how much saving/deleveraging is going on out there, and would like to come to my own conclusions.

leftback said...

St. Louis Fed is a source:

Raw US Savings Data

k1 said...

Thanks LB. St. Louis Fed's FRED repository seems worth some spelunking. Recommended for anyone else curious about where the numbers come from.

jill said...

Why is everyone so shocked regarding Goldman's dealing with Greece when it was broadcast to the world in 2003...

This headline is from July 1, 2003...

With the help of Goldman Sachs, Greece has been using giant swaps deals to ensure its national debt ratios meet EU targets. But these deals are likely to prove controversial. By Nicholas Dunbar