A big spike in the 10 year treasury yield was not really on my mind before today. I was most concerned about a potential ‘black Monday’. Fortunately common shares traded in a pretty wide range today with tremendous volume and closed with only a very minor loss on the S&P500. Unfortunately folks all of a sudden quit worrying about a recession and sold off the bond market sending the 10 year treasury yield up to close at 4.15% – up 17 basis points.
Now as income investors we are in a bit of a bind–just a bit. My ‘plan’ was to see rates go down in the 3.75% area and stick in that area, which would shove preferreds and baby bonds up by maybe 5%. So much for my plan–oh well we simply have to wait and see what investors decide to do next. I don’t believe that the tariff situation is even close to over and honestly I have to believe that consumer confidence has been swatted lower by the last 3-4 days of trading–and chaos.
I mentioned I made a couple small purchases today, but I would be surprised if I do anything at all tomorrow. Accounts were red today, but the total damage wasn’t highly significant and I feel fairly fortunate to have gotten to this point with less than a 1% portfolio loss–BUT we have a long way to go with the tariffs and we have CPI and PPI released later in the week.
I hope folks are accomplishing their investing goals–for those looking for a nice income stream that means finding bargains in strong securities and averaging in. For those looking for some capital gains (like me) we will simply have to see if this economy is going to soften enough to send interest rates lower–not sure we are going to see much help from the Fed at this time.
Rates jumped yesterday afternoon in the U.S. and the Japanese 10 year increased 15 bps. The rumor was floating around that the Chinese were dumping their U.S. treasuries. If so, they were probably also dumping Japanese treasuries. Rather than punishing Trump, the Chinese may just need to accumulate cash. The Chinese are already issuing large amounts of debt to bail out their local governments and to stimulate Chinese consumption. Who is going to take the place of US consumers for manufactured goods?
I read where the Chinese government was buying up stocks to keep their market propped up. But they have lots of ways to do that. Selling treasuries is one. But they can also order businesses to buy more stocks since the government pretty much controls all enterprise there.
It is all very opaque.
Hi Scott
we track China pretty closely (that is where most of our businesses and clients are). I spent several hours on the phone overnight (daytime China) discussing some of these issues with my colleagues.
you are correct that the gov could have companies buy stocks, but there is a liquidity problem there. The gov has been pounding companies financially for several years – for example, requiring them to keep employees they don’t need and to pay during shutdowns/slowdowns, etc. in order to fight unemployment. Lots of companies just being hollowed out and just don’t have the cash/can’t afford the potential losses the stock market can drive.
Chinese companies have basically two choices of where to invest their cash – stocks or gov. bonds.
-Companies don’t want to buy stocks because of the huge volatility and ongoing losses.
-The bond market is locking up – to the extent that the Chinese gov. has been forced to publicly announce that it will stop buying Chinese bonds. Rates have been dropping to near zero because they are so overbought.
In a sense, China has already “pulled this lever” about as far as it can (IMHO).
In addition to the issues Potter mentioned, China has other huge financial woes. For example, it is trying to contain the bursting real estate bubble disaster it has created (largely by lying about its population growth – it claimed growth for years when it was actually shrinking) and it has has dumped way over a trillion dollars into its belt and road initiative – which is simply not paying back. They have breathtakingly high youth un- and under-employment, aging population woes, etc. all of which stress the economy.
Lots of problems weighing on their finances
So, to me, it is just not surprising that China continues to sell of US and Japanese treasuries. Not to make a political statement or cause upheaval – just because they need the cash. Over the last decade (or so), they have been selling off US treasuries. Their official holdings are down about half from their peak to about $760B (last reported number treasury has published – it is likely lower today because of recent selling).
If you read the propaganda from China, they say they are selling bonds and buying gold to strengthen their financial base. From some hints we are seeing in other channels, I personally wonder whether they are actually buying all the gold they claim they are. It is one of the few big financial moves they can make for which there is not a “market” way to validate. They could be saying they are buying gold and in reality just be spending the money to prop up their economy.
To me, this says that the “brave face” that China is putting up on tariffs is not based in reality. They are being “fierce” to try to mask their weakness.
They can redirect some purchases (ores, coal, lumber, grain,etc.) to non-US sources to “punish” the US, but the loss of export sales (because of US tariffs and from slowing demand in the US overall) will be a huge hit to their economy. They can mask that for a while (few of the economic numbers they publish are based in reality – a trend that has been getting worse under XI), but they will struggle to avoid the real-world impacts on their economy.
It will be fascinating to watch how this plays out.
My accounts were flat yesterday 4.6.25. Today they are down slightly over 1%. Liquidity drying up when prices move lower. Investors seem to keep looking for whoever is going to get slammed by a margin call. I was still able to move a few shares today. I was trying to load up on CY 8%-9% issues if possible the last couple of days. It’s kinda weird saying goodbye to those 6%-7% ones though.
For those who don’t know me, I follow a simple long only strategy. I use PM’s and miners to protect against the ‘flations. I also like to use XOP as a inflation protector along with other commodities mostly. It is getting a bit easier to move in and out of 1k par bonds too. I do a lot of swing trades I guess (never liked the name). I try to stay 100% invested at all times and only pay par or less.
BOT
CCIA – I was hoping to get back into this one after I sold it.
FGN
SWKHL
SLD
ECCF
FGN
SWKHL
As far as interest rates go, I am no forecaster. I will do a Gretzky and say the current POTUS will eventually push down rates. I don’t think this will be a fast process and could take the entire term to accomplish. It’s obvious Powell has no desire to help the POTUS at this time with a rate cut. I think POTUS will get that cut only after Powell & Co have no choice. The POTUS has shown that he doesn’t mind taking the shortcut to grandmas house which of course are filled with teeth chattering potholes. YMMV DYODD
Tim, wouldn’t surprise me if China was dumping Treasuries while using the proceeds to prop up thier markets and punish Trump.
Doubt China would take needless big losses to ‘punish Trump’. There are likely many better ways to do that.
MSQ,
China only holds about 2.7% of US debt (IIRC).
Even if they dumped it all (and likely took a big financial hit on it for dump-selling), I don’t think it would be enough to really hurt the US for any appreciable period of time.
IMHO, there would be some short term turmoil as the market absorbed it, and the stock market would shudder a little with talking heads ratcheting that that up, but it wouldn’t last and wouldn’t create near the mess tariffs have.
It sounds like a nice threat, but they only have a cap pistol pointed at us.
Bond rates increased worldwide.
You are doing well; i am down 2%.
Mostly hold, SGOV, Preferrds (floating and short term, a few perps too) and cash but also have target funds 2025 and 2030. They hurt bad on Friday.