US Treasuries – the market switch

Posted: January 30, 2018 in Uncategorized

Markets

The US Treasuries 10 year T-Bond are over 2.71% and the market is shaking.

It is a difficult argument to explain, but it is very much critical to understand it.

When the US Treasuries are sold, their yield increase. By the institutional market this is considered the no-risk yield (as the US should go in default if not paid).

As the mega pension fund have to allocate money to the Government bond or stock market they will always allocate the money where the yield is better (to rely on yield to pay pension is much smarter than rely on gains).

As long as the yield on T bond is under 2.5%pa it is clear that is better to allocate to the share market.

Between 2.5% to 3% it is still convenient to allocate to the market, but is more of a grey zone – specially over 2.8%pa.

Over 3% it is definitely better to take the money out of the share market and into the bond market.

As we are talking about trillion of dollars, the effect is quite nasty.

Geopolitics.

There is also a geopolitical side? Who is selling so much T bond to spike the yield?

There is no public information about this, but a guess

  • Apple and company in order to pay the tax bill for the repatriation (that would be temporary as once paid, the money will go to buy Treasuries, once the tax is paid in April?
  • The Chinese as a warning shot against further US trade sanction?
  • The European disengaging by the Trump led US after Davos meetings?

Probably all three and something else.

 

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