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Trading Lessons

China Potentially Threatens a Near Term Us Treasury Bond Market Short Squeeze!

Interest-Rates / US Bonds Jan 08, 2017 - 04:26 AM GMT

By: Gordon_T_Long

Interest-Rates

Problems in China are looming on top of an already very tenuous and misunderstood situation in the US Financial Markets. Additionally, Federal Reserve Policy has made the situation even more combustible!

As a result of a Trump Victory inspired bond market massacre there are now few places that a yield starved world can presently find better risk-adjusted yields than in US Treasuries. With China now being forced to sell their FX Reserves and thereby creating  the much needed supply so eagerly craved by foreign investors, it is also further depleting an already restricted EuroDollar pool required to buy this supply. There are consequences of this combination of shifting global parameters.


The Obama administration had been quite successful in orchestrating and limiting Treasury supply, thereby assisting the Fed in driving yields lower! That is all potentially about to rapidly change. In fact, the match may have already been lit!


An Extremely Tenuous Situation

Though US Bond Yields are likely to head higher later in the year as Trumponomics unfolds, there are some serious and unexpected imbalances to be corrected in the near term.

The imbalances have all the ingredients for a short squeeze which triggers a classic "rotation".

Russell 2000, VIX and 10-Year Treasury

Presently Being Made Much Worse By Fed Policy!

In A NIRP World (~$12t)

The Risk-Adjusted, Dollar Denominated Us Treasury Has Suddenly Become The Holy Grail!

Interest Rates

Major Holders ofbTreasury Securities

Meanwhile Money Is Fleeing China Anyway It Can - Despite Futile Capital Control Attempts.

Bitcoin Denominated in Chinese Yuan

USD/CNY

China Is Trapped and is Now Being Forced To Sell Us Fx Reserves

Reserve requirements are lowered alongside falling FX reserves. These are coordinated in order to mitigate negative effects from changes in the domestic money supply.

China FX Reserves

China's Mercantile, Export Lead Strategy May Have No Other Way Out in The Near Term!

Widening Credit Gap

You may want to read a more technical analysis we recently published entitled: A Broken Bond Bounce Beckons!

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Gordon T. Long
Publisher - LONGWave

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments. © Copyright 2013 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or suggestions you receive from him.

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