China’s stock crash spread throughout the world last week as money moved to the safety of U.S. Treasury bonds. That’s normal when investors are skeptical of stocks. So is the resulting drop in yields, but yields didn’t drop as much as you might expect.
The reason being – China has also been selling their U.S. Treasury holdings to support and devalue the yuan for the umpteenth time. So, what should have been a major rally in bonds and falling yields has been tamped down by Chinese selling.
While China’s move did temporarily stabilize their currency, it’s much too soon to say if the effect will be lasting. But it sure seems like they’ve been trying this a lot lately!
Russia’s currency has also fallen substantially, and they’ve resorted to the same measure – reportedly selling U.S. Treasury bonds. But, they hold a fraction of what the Chinese hold. The Russian central bank holds only about $86 billion, while China holds over $1.2 trillion.
Central bank selling could last another month or two, but as long as there is fear in the markets, investors will seek out the safety and relatively good yields in U.S. Treasury bonds. So volatility will almost certainly continue.
And they’ve most certainly traded in a volatile range all month. Take a look at long-term Treasury yields since a month ago. I’ve marked when the yields have popped up due to China selling.
Looking forward, here at home December’s retail sales report will be out Friday along with the Producer Price Index (PPI). Retail sales could be a market mover if there’s a surprise. And the PPI has shown deflation the last two months, so if the trend continues, it could translate into consumer deflation. That would certainly get the Fed’s attention.
There are nine Fed officials scheduled to speak this week, and they’ll be trying to reinforce the idea that there will be multiple rate hikes this year. They’re holding on to the idea that employment is strong, even though wages are not rising and quality of jobs is suspect. They’re hoping all of the weakness in commodities and economic data is temporary.
Editor, Treasury Profits Accelerator