Notes From Underground

On Friday, U.S. 30-YEAR BONDS were the best performer as the 5/30 yield curve flattened in the face of several divergent asset movements. The GOLD rallied even as the stock markets rose around the world, so no need for haven status. The DOLLAR had actually been strong in the morning but as global stock markets rallied the DOLLAR was actually lower by late afternoon. So why was the 30-YEAR BOND the premier asset? I have no idea. Over the weekend there was a Yahoo Finance story in which Jeffrey Gundlach is quoted as speculating that long-end U.S. Treasuries will see 4 percent yields later this year.

The media is full of warnings about rising government and corporate debt levels at a time when we are in the “late innings” of the current economic expansion. I’m returning to Gillian Tett’s Financial Times piece on Feb. 8 (“America Faces Battle to Find Buyers For Its Bonds”), where Tett wrote about the recent letter Beth Hammack and the Treasury Borrowing Advisory Committee (TBAC) sent to Treasury Secretary Steve Mnuchin.

“According to TBAC calculations, America will need to sell an eye-popping $12 TRILLION of bonds in the coming decade, sharply more than it did in the past 10 years,” Tett wrote. “This will ‘pose a unique challenge for the Treasury,’ Ms. Hammack warned, even ‘without factoring the possibility of a recession.’ In plain English, the Wall Street luminaries on the committee were asking who on earth — or in global finance — will buy this looming mountain of Treasuries?”

The suggestion by TBAC is that lack of foreign buying is presently being filled by American households as the holdings of domestic savers has grown to $2.3 trillion from $1.9 trillion over the last year, replacing the drop held by non-American entities from 45% a decade ago to 36% last year, Tett said.

This raises a question in my mind: What constitutes American households? Is this just another move by the Wall Street fiduciaries of pension funds to set the pension holders up for another lackluster performance, if not worse? It is no secret that U.S. pension funds are severely underfunded even as we have experienced one of the longest BULL MARKETS in financial history. I understand duration matches for pensions and insurance plans. But what I fail to comprehend is how the BOGEY is 7 percent and the plan administrators are purchasing massive amount of long-term debt yielding less than 3 percent. So if Gundlach and others are correct in their analysis about the current danger of rising government debt during the times of ROBUST growth, plus increased discussion about modern monetary theory, then THOSE PURCHASING LONG-TERM U.S. DEBT CERTAINLY FEAR NO EVIL.

On Friday, the FT published a story titled, “Taiwan Insurers Skirt Restrictions to Load Up On Dollar Bonds.” The article, by Edward White and Robin Wigglesworth, noted that in a desperate need for higher returns, “the trade is buying locally listed exchange traded funds that purchase overseas, dollar-denominated corporate and sovereign bonds. The funds are denominated in the Taiwan dollar, providing a way around recently imposed regulatory restrictions on foreign assets.” But as Wigglesworth and White said, “the boom raises questions about the currency risks that insurers are taking on, and the outsized role Taiwan’s insurance companies play in the global market.”

The bottom line is that the search for yield, the global insurance industry is creating systemic risks of enormous proportions, especially as the U.S. embarks on a political discussion of the insignificance of DEBT because it has cheap rates and a printing press. To Larry Summers, Jason Furman, Bernie Sanders,and a group of new legislators proclaiming that DEBT doesn’t matter, the Taiwanese have lost their fiduciary compass. Yet I fear no evil.

Tags: 30-year bonds, 5/30 Yield Curve, insurance companies, TBAC, U.S. debt

This entry was posted on February 18, 2019 at 12:20 pm and is filed under Debt Market, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.