News Fatigue

Mid Week Bond Update

News Fatigue

Financial markets appear to be looking past the recent bombs and bombast over Syria...


...and focus on fundamentals.  U.S. equity volatility, as measured by the VIX Index, has fallen from its April 11 intraday high of 21.66 to a mid-afternoon low of 14.57 on April 17; the EURO STOXX 50 Volatility Index (the European equivalent of the VIX) traded near its 5-day low of 13.22 on April 17. Clearly, the recent big intra-day swings in stock prices aren’t scaring off investors.

In fixed income, there’s been plenty of headline news that could shape perceptions about fundamentals, but it’s hard economic data that appears to be calling the shots. In the U.S., rising shorter-term yields are causing the yield curve to flatten.[1] While some blame expectations of a glut of shorter-term U.S. government borrowing, another reason could be optimism that capital requirements for the banking sector in the U.S. may fall if, as many expect, Dodd-Frank regulations are reduced or repealed by Congress -- decreasing the demand for Treasuries from banks to help buttress their balance sheets.

 

Source: Bloomberg, April 17, 2018 Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

On the Rise:  China’s Holdings of U.S. Treasuries

The U.S. Treasury Department keeps track of the bonds it issues, and its most recent figures have a surprise: despite the public debate, China boosted it holdings of Treasuries by about $8.5 billion in February 2018 vs. January, to just under $1.18 trillion. That’s lower than the all-time high of November 2013 of $1.32 trillion, but by no means a sign of disenchantment.

 

Source: Bloomberg, April 17, 2018 Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


China isn’t the only owner of U.S. debt; that honor goes to the Federal Reserve, with over twice the inventory. So in terms of increased supply of Treasuries on the open market, Fed policy deserves its share of attention as well.

 

Source: Bloomberg, April 17, 2018 Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

On the Slide: U.S. Dollar

On a trade-weighted basis, the U.S. dollar has fallen about -0.2% over the past five days. The greenback is about flat against the euro, which now trades at $1.237; against the British pound, the dollar is down -0.8%, with the pound now worth $1.429.

But in the current trade environment, the most closely-watched currency is the Chinese yuan. The daily exchange rate set by Beijing stands at 6.2854 per U.S. dollar.2 Year to date, the currency has appreciated just over 3.5%; since its 5-year low against the U.S. dollar, the yuan has appreciated about 10.7%.

The exchange rate is now managed, as a matter of transparently stated policy, against a basket of currencies. As a result, the Chinese currency has been deemed to be a reserve currency by the International Monetary Fund (IMF), the first emerging-market currency to gain that status.

Despite the spotlight on this one currency, the U.S. dollar overall appears to be driven, even in the short run, by the prospect of improving economic conditions, both in the U.S. and elsewhere. The effect, paradoxical as it may seem, is to keep downward pressure on the greenback, public statements to the contrary notwithstanding.

 


1 Source: Bloomberg. Between April 10 and 17, the it was the 2-year and 3-year yields that rose the most , at 8.2 and 8.3 bps respectively, to 2.391% and 2.519%; the 30-year fell -2 bps.

2 Source: Official Close, China Foreign Exchange Trade System via Bloomberg, April 18 2018, 16:30 PM Beijing time.

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Yields and dividends represent past performance and there is no guarantee they will continue to be paid.

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