Is the weakening dollar beginning to weigh on Treasury prices? Even though foreign ownership of the US Treasury has declined dramatically over the last 10 years [declining from 34% in 2014 to 23% today], foreigners still own about $8.3 trillion of our debt. Japan is now the largest owner of US debt according to Barrons.
Most were taught that a strong dollar is necessary to encourage foreigners to own our debt as a lower value dollar dictates higher Treasury yields given currency exchange rates.
Many were/are perplexed that longer dated Treasuries have not increased more significantly in yield given past, current and expected inflation, amplified by Quantitative Tightening (QT).
Mortgage rates have reacted accordingly but longer dated Treasuries have not.
Will the yield curve revert to its average? According to Citicorp the long-term average difference between the 2-year and 30-year Treasury is about 2.38%.
During 2022 and 2023 the yield curve between “2s and 30’s” was inverted by 45 and 115 bps, respectively, the result of the most aggressive Fed in history that unexpectedly increased short-term interest rates by an exponential amount.
Will the yield curve swing to the other extreme, defined as over 500 bps as was the environment 35 years ago, the possible catalyst is a declining dollar amplified by generational high inflationary expectations and huge demand for monies?
Considerable attention has been based on the percentage of US Treasuries maturing in 12 months—about 23% to 24%, versus the recommended amount of 17% to 18%.
Who and “what bucket” will buy the massive amount of Treasuries being auctioned?
Currency dislocations are the genesis of many market dislocations.
Yesterday the yield curve steepened with the 30-year Treasury broaching the psychological level of 5%. An obvious catalyst was missing other than the continuing sell off in the dollar.
Changing topics, Wall Street’s epic rebound from April’s meltdown is continuing albeit there are some signs of exhaustion. Following a 22% surge from last month’s intraday lows, several bulge bracket firms are stating the averages are edging into a manic environment.
Bloomberg writes since the closing low on April 8; the S & P 500 has climbed 18% in the past 24 trading days—a feat that has occurred only six times since 1950. According to Robinhood, retail investors have “poured back in the stock market” during the past week.
Have prices gone too far too quick? Will momentum—today’s primary variable—radically change from an infinite number of reasons?
Today both the PPI and retail sales are announced. How will the data be interpreted? As noted, consumer prices have been lower than forecasted for three consecutive months. It is doubtful that a similar statement could be made about producer prices given that some entity has to absorb recent price increases, partially the result of the tariffs.
Also released today is Industrial Production/Capacity Utilization, business inventories and a home builders sentiment survey.
Last night the foreign markets were down. London was up 0.15%, Paris down 0.18% and Frankfurt down 0.11%. China was down 0.68%, Japan down 0.98% and Hang Seng down 0.79%. Futures are down about 0.5%. Wal-Mart reported strong sales and profit growth but warned about price hikes in the intermediate future, further stating the company is attempting to plan for a “wide range of pretty extreme outcomes.” The 10-year is up 3/32 to yield 4.51
