Do central bankers have it in for the world's most widely cited Treasury bond bear?
You might well ask after reading the latest report from the rates strategists at Bank of America Merrill Lynch. They contend that global central bankers are about to spring off the sidelines to buy Treasury debt, in what stands to be the latest setback for the Pimco bond fund manager's giant bet against U.S. government bonds.
Since the Fed's latest round of bond buying started last November, BofA says, cash -- mostly in the form of dollars -- has been piling up in places like Brazil and India as money rushes toward faster-growing economies, in the form of trade surpluses as well as Fed-fueled capital inflows.
But in a familiar refrain, the bankers getting deluged by this money torrent have been sitting on their hands. Foreign exchange reserves held as bank deposits recently hit their highest level since the collapse of Lehman Brothers, BofA says, while the ratio of securities held for each unit of bank deposits has been dropping back to its post-panic low. What's more, the pace of foreign official Treasury accumulation slowed sharply in the fourth quarter.
There is, in short, a good deal of pent-up demand for Treasury bonds -- which is why BofA strategist Priya Misra sees solid support for the U.S. government bond market even after the Fed kicks its $75 billion-a-month habit.
"We believe the most likely explanation is that some reserve managers are awaiting the end of QE to put cash to work in the Treasury market, perhaps driven by the belief that rates are being kept artificially low by the Fed's steady buying," writes Misra.
The fog of foreign reserve data means that it's impossible to say for sure what is going on with the central bankers. That goes particularly for the mandarins perched atop the elephant in this room, China (which controls a third of the world's $9.2 trillion in foreign exchange reserves).
Even so, there are some clear signs that the Fed's decision to support the U.S. economy with a flood of dollar liquidity caused some behavioral changes among the globe's other dollar accumulators, from Indonesia and Poland to Japan and Russia.
"Beginning in November 2010 some of these central banks began to put a sizable amount of new cash into deposits at official institutions such as the Bank for International Settlements (BIS) and, to a lesser extent, at commercial banks," Misra writes. "Note that this marks the first sustained increase in deposits since the onset of the financial crisis."
Of course, as much as you might like your friendly local banker at the Bank of International Settlements, no one likes collecting 0.1% annually at a time when inflation is on the march. That's why BofA expects foreign reserve managers to start marching back into the Treasury market -- particularly in two-to-seven-year notes, all of which are being auctioned next week.
Demand for Treasury debt has been picking up anyway, thanks to slowdown signs in the U.S. economy and the fear that Europe's debt crisis is about to spiral out of control again. But unless Congress goes through with its threat to blow up the country in a stupid fight over the debt ceiling, lower Treasury yields look like a pretty good bet for the rest of 2011.
Looking for a bubble? Look no further than the U.S. stock market.
So says value investor Jeremy Grantham. He warns in his latest letter to investors that stocks' liquidity-fueled cruise will end in a headlong collision with the rusty garbage scow of economic reality.
The result, he predicts, will be a plunge of 30% or so in the S&P 500, recently at 1340 (see chart, right).
Stocks are so inflated and so certain to MOREColin Barr - May 12, 2011 6:26 AM ET
A little Treasury rally doesn't faze the loquacious bond bear Bill Gross.
Gross, the manager of the world's biggest bond fund, increased his bet against U.S. government debt last month while adding to his record cash position – even as bond prices rallied.
Gross' Pimco Total Return fund held 43 cents of cash for every dollar it had in assets, according to data from the end of April (see chart, right). That's MOREColin Barr - May 10, 2011 10:31 AM ET
The coming bond market bloodbath won't necessarily look all that bloody.
So says the shy and reclusive Bill Gross, who is out Tuesday with his latest monthly investment outlook. Gross, who runs the world's biggest bond fund at Pimco, has been screaming for months that the sky is falling in the government bond market, thanks to an untenable U.S. fiscal position and all the problems that come with it.
But in the MOREColin Barr - May 3, 2011 1:32 PM ET
Where's that bond market bloodbath we're all waiting for?
Bondholders are doomed, we keep hearing. Pimco's Bill Gross last fall promised a Treasury market turkey shoot – and that was before the government declared a profligate payroll tax holiday and the political parties presented irreconcilable deficit-cutting plans.
Add political gridlock to runaway spending and you have a recipe for an imminent bond market collision with reality. If Monday's S&P warning on U.S. MOREColin Barr - Apr 19, 2011 12:02 PM ET
Bill Gross is putting his investors' money where his sizable mouth is.
Gross, who manages the world's biggest bond fund and has spent recent months jawboning about the dangers of U.S. debt, has placed a $7 billion bet against Treasury bonds, according to the latest statistics released by his Pimco Total Return fund.
Gross made a splash last month by selling all the big bond fund's Treasury holdings and calling the federal MOREColin Barr - Apr 10, 2011 7:51 PM ET
Bond manager Bill Gross says he is "confident" the United States will effectively default on its debt unless Congress takes an ax to retirement and healthcare spending.
Gross runs Pimco, the $1.2 trillion investment manager that has spent recent months selling Treasury bonds, citing their low yields and poor prospects. He explains in his monthly investment outlook posted Wednesday evening that U.S. government bonds "have little value" in a world of MOREColin Barr - Mar 31, 2011 5:40 AM ET
Bill Gross says stocks and bonds could be in for a world of hurt this summer.
Gross, who runs the world's biggest bond fund at investment manager Pimco, said in his March investment outlook that when the Federal Reserve's quantitative easing program ends in June, bond yields are likely to go "higher, maybe even much higher."
That will spell pain for bondholders because rising yields reflect falling prices. But it could also MOREColin Barr - Mar 2, 2011 10:56 AM ET
In a sign of how much fear is swirling in Europe, bank stocks erupted in celebration after Portugal failed to blow up.
Shares of big Spanish banks surged 10% and lenders in Germany, the Netherlands and the U.K. rose 5% after Portugal sold 1.25 billion euros ($1.63 billion) of bonds in its latest effort to fend off a market panic.
The bond sale prompted Portuguese officials to say for the latest time that they won't MOREColin Barr - Jan 12, 2011 1:40 PM ET
Reports of the dollar's death may be exaggerated, but everyone's favorite bond guru wants to remind you that the prognosis is still not looking good.
Pimco's Bill Gross said in his monthly investment commentary Wednesday that America's leaders don't seem to realize it, but the country faces a competitiveness crisis that if left unaddressed will further hollow out a rusting jobs base and erode U.S. wealth – including the value of MOREColin Barr - Dec 1, 2010 11:49 AM ET
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