Disclaimer: This post contains financial mumbo-jumbo, and hence, you may find it boring. Just because you’re an i-banker or you understand such stuff, or the rare animal, the i-banker who understands such stuff, doesn’t mean you should read this. Insomniacs, on the other hand, please go ahead. In fact, do read the whole blog. If that doesn’t do the trick, this blog definitely will.
The below news article happened to catch my eye a couple of days ago, and to me, it looked like the clearest sign that QE3 will not happen.
Chinese Holdings of Treasuries Climbed in April as Fed Purchases Near End:
The Communist nation’s holdings of longer-term notes and bonds rose 0.8 percent to a record $1.149 trillion in April, surpassing the $1.145 trillion held in December, U.S. Treasury data released yesterday show. Holdings of short-term bills maturing in one year or less declined by 32 percent to $3.9 billion, the least since April 2004, the data show.
That, my friends, is a flattener trade, if I ever saw one – lopsided, but still a flattener. (For those readers, who disregarded my disclaimer above, and still proceeding braveheartedly, really, what kicks are you getting out of this?)
And, if there’s anything I learnt from my trade, you just don’t put that kind of money at stake, without have some sort of guarantee from the issuer.
But you could argue, it’s just a net change of $2 billion odd – which really doesn’t make a difference in the market with that sort of liquidity. But taken in context with how China tut-tutted when QE was announced – and then it takes on a new dimension:
Chinese officials, as well as those in Germany and Brazil had been critical of the Fed’s asset purchase plan when it was first announced in November, said the proposal would be inflationary and could hurt the value of dollar-denominated assets. The Fed became the largest owner of Treasuries through what has become known as its policy of quantitative easing, in which bonds were bought to add cash into the economy and reduce the risk of deflation. The purchases end this month.
“One might draw a loose conclusion that they stepped aside at the onset of QE and during the period of time when the economy seemed to be gaining better footing and there were some inflationary concerns,” said Chris Ahrens, head interest-rate strategist at UBS AG in Stamford, Connecticut, one of the 20 primary dealers that trade with the Fed.
And oh, this makes it even more interesting:
Even with the increase, the data “underestimates what China’s buying,” said Scott Sherman, an interest-rate strategist at Credit Suisse Group AG in New York, a primary dealer. “China deals through foreign intermediaries” leading to initial tallies counting their purchases as belonging to other holders, such as the U.K.
All ye i-bankers out there, if you have wasted your precious time reading this sorry blog-post, well, enjoy your free time, while you can. I foresee a lot of work in the coming quarter. (Subject to market conditions. Of course. But ye i-bankers already knew that, didn’t you?)
City Lights 