In the not to distant future, the US government will need the rapidly growing Boomer retirees to buy large quantities of Treasury debt. The demand may need to be prodded by higher rates, tax liability, or direct mandate.
We are putting out the invitation because the 3 most consistent buyers of paper are ALL going to reduce their participation at once. The Fed is going to walk back from LSAP balance sheet expansion toward a rates regime. Japan will remain committed to Abenomics. China will have to adjust to declining FX reserves by floating the Renminbi. Everything that happens in Economics happens “at the margin” and these significant trend changes have already begun.
And we have discussed several times right here, the Fed’s balance sheet expansion is highly correlated to PBOC balance sheet assets. 83% of PBOC “assets” are FX reserves, a level that would spark fear in lesser EM nations. Capital left China during the recent EM drawdown and “tightening” up rates spread through EM countries. Indonesia and India took an overt approach while China used persuasion and Shibor. We continue to believe the Triad of official buyers of US Treasuries is pulling away and China is inching toward floating its currency. These are MAJOR secular changes.
Written By: Kevin Ferry