Will China Nuke Its Own Treasury Portfolio?

George Yacik - INO.com Contributor - Fed & Interest Rates - China U.S. government debt


If you’re an investor in U.S. Treasury bonds, should you be worried that China may go nuclear? (No, not that kind of nuclear, the kind in the headline of a recent Reuters article about China’s supposed “nuclear option” to stop buying, if not outright sell, its huge holdings of American government bonds).

According to that report – speculation, really – China may consider retaliating against President Trump’s tough tariff talk by pulling its indirect support of the U.S. government, namely its holdings of about $1.2 trillion of Treasury securities. That makes it the largest foreign holder of that debt. Japan is a close second with $1.1 trillion, while Ireland (Ireland?) is a distant third with $328 billion. Altogether, $6.2 trillion of the U.S. government’s total debt of $20 trillion is held by foreign entities or about 31%. That would put China’s share at about 18% of the total foreign-held amount and less than 6% of the grand total.

In case you were wondering, the Federal Reserve holds about $4.5 trillion of the national debt or about four times what China owns. The Social Security Administration owns about $2.8 trillion.

So, is this something we really need to be worried about, even under the remote possibility that China would actually, in financial terms, cut off its nose to spite its face? Continue reading "Will China Nuke Its Own Treasury Portfolio?"

The Powell Era Begins

George Yacik - INO.com Contributor - Fed & Interest Rates - Powell


New Federal Reserve chair Jerome Powell had all kinds of excuses not to raise interest rates at last week’s FOMC meeting:

  • The yield on the 10-year Treasury note was trading close to its highest point in more than four years and dangerously close to breaking the 3% barrier.
  • Stocks have fallen well off their highs, and investors are nervous about the prospects of a potential trade war between the U.S. and its biggest trading partners, particularly China and Canada.
  • The threat of that trade war has influenced some economic forecasters to lower their GDP growth forecasts for the first quarter to below 2%, which would be the lowest level since President Trump took office.
  • The turmoil in the Trump Administration, with cabinet secretaries and other senior officials jumping ship or being pushed overboard, doesn’t help calm the waters.

Yet Powell and the seven other voting members of the Federal Open Market Committee saw fit to raise the federal funds rate by a quarter percentage point to a range between 1.5% and 1.75%. Not only that, but the FOMC stuck to its guns and indicated a steady diet of rate increases over the next three years, pushing rates closer and closer back to what used to be normal before the global financial crisis. After three rate increases this year, three more are likely next year followed by two more in 2020, which would boost the fed funds rates to a range of 3.25% and 3.5%.

And yet the world didn’t end. In fact, the yields on Treasury securities actually fell after the meeting ended on Wednesday afternoon. The 10-year note, the bond market’s long-term benchmark, trading just below 2.90% on Tuesday, fell five basis points after the meeting to 2.85%. The yield on the two-year note, which is more sensitive to interest rate changes, dropped seven bps after the meeting. Continue reading "The Powell Era Begins"

Be Careful What You Wish For

George Yacik - INO.com Contributor - Fed & Interest Rates -
 Glass-Steagall


When doing some background research for this column, I came across this article in the May 12, 2017, edition of the Los Angeles Times: “Something Trump and Elizabeth Warren Agree On: Bringing Back Glass-Steagall to Break Up Big Banks.”

Whatever happened to that idea?

As kookie and wrong-headed on other issues as Senator “Pocahontas” often is, she’s at least been pretty consistent when it comes to her view of the banking industry (she doesn’t like it). And according to the article, she wasn’t alone in wanting to “break up the biggest U.S. banks.” Guess who else was on that list? None other than departing White House chief economic advisor Gary Cohn.

Trump himself said, “We’re looking at it right now as we speak,” referring to “going back to the old system” under the Glass-Steagall Act in which commercial and investment banking were separated. Continue reading "Be Careful What You Wish For"

The "Do Nothing" Fed Does It Again

George Yacik - INO.com Contributor - federal funds rate remains unchanged


I suppose it would have been out of character or asking too much to expect Janet Yellen’s Federal Reserve, at her last meeting as Fed chair, to act decisively and do something that needed to be done. Instead, playing to form, The Fed elected not to raise the federal funds rate at its January monetary policy meeting. Now we will have to wait another two months, March 20-21, the Fed’s next meeting, for the central bank to get back to normalizing interest rates.

For most of the past four years, the Yellen-led Fed has preferred to sit on its hands and let asset bubbles get bigger and bigger and leave interest rates pretty much alone, even in the face of a burgeoning economy. Instead, it has let its obsession with inflation – it’s too low, in their view, not too high – dictate monetary policy, whether that fixation has a basis in fact or not.

Since the beginning of last September, the yield on the benchmark 10-year Treasury note has soared about 75 basis points, from just over 2.00% to more than 2.75% at its most recent peak, putting it at its highest level in nearly four years. The yield on the two-year note, which is more susceptible to changes in short-term interest rate changes, is up about 90 bps in that time, to about 2.15%. Continue reading "The "Do Nothing" Fed Does It Again"

Farewell Janet, Welcome Jay

George Yacik - INO.com Contributor - Fed & Interest Rates


After four years as Federal Reserve chair, Janet Yellen makes her swansong at this week’s monetary policy meeting (no disrespect to Ms. Yellen, but it seems like a lot longer, doesn’t it?), at which time she will likely welcome her successor, Jerome Powell, who was finally confirmed by the Senate. Her term officially ends on February 3, at which time she has said she would also step down from the Fed’s Board of Governors, where she was entitled to remain for another six years.

While most observers believe Powell won’t deviate too far from the dovish, don’t-rock-the-boat policies of his predecessor, I think he’s likely to be a little more hawkish in raising interest rates, if for no other reason than to skim some of the froth from the stock market. Another quarter-point increase in the federal funds rate at next week’s meeting would be a good signal about what to expect from the Powell Fed going forward.

I’m still not entirely sold that inflation won’t at some point in the future rear its ugly head once again, mandating a more aggressive interest rate-raising policy, but the bond market – based on still relatively low long-term Treasury bond rates – apparently has yet to be convinced. Still, inflation, whether just boiling under the surface or several years down the road, isn’t the only reason the Fed needs to be more hawkish. Taking some air out of asset bubbles – whether they be in old-fashioned equities or yet-to-be-tested cybercurrencies – that has primarily been the result of the Fed’s overly accommodative monetary policies is a good enough reason to do so. Continue reading "Farewell Janet, Welcome Jay"