"I believe in social dislocation and creative trouble." - Bayard Rustin
The S&P 500 vs US 10 year bonds - Graph source Bloomberg:
We discussed this topic with our good cross-asset friend and fellow "Macronomics" blogger "Sormiou". We thought this time around we would entertain you with some interesting points he made and add our comments as well:
"The dislocation that started mid-April is becoming more and more "puzzling":
Noise 1: on-going Chinese Treasuries buying, through Belgium, cf the on-going CNY slide and Belgium Treasuries holdings stats strangely exploding
Noise 2: simply short covering on T-Note
Or bond markets sending alarming growth/inflation message, that equity markets do not want to hear?"
As we posited in our last post "The Vortex Ring", the upcoming re-allocation process from Japanese behemoth GPIF, will continue to put additional downward pressure on core government bonds. For instance the pressure can already been seen coming from Japanese investors as indicated by Nomura in their latest "Summary of Japanese investment in April". While banks have been shedding foreign assets, key investor types such as insurance companies, pension funds and toshin companies have been significant net buyers of foreign assets:
"Insurance companies: Insurance companies accelerated their investment in foreign bonds, while slowing their investment in JGBs (Figure 1).
They purchased JPY633bn ($6.2bn) in foreign bonds, and there has been net buying of foreign bonds by insurance companies for three months in a row. Major lifers. financial results show they increased their exposures in EUR-denominated assets aggressively in FY2013, and they are likely
to keep adding exposures in EUR-denominated assets in April, as the share of EUR in total foreign assets remains lower than before the Euro crisis. While the strong investment in foreign bonds was partly owing to the beginning of the new fiscal year, we expect lifers to be more positive on foreign bond investment as Japanese yields are still low. In fact, insurance companies. superlong JGB investment slowed to JPY226bn ($2.2bn), the smallest amount since April 2013. Their investment in JGBs also slowed to its smallest amount since May 2012 (JPY567bn or $5.5bn). The liquidation of domestic equity exposures continued at a moderate pace (-JPY35bn or $0.3bn).
Banks: Banks sold JGBs at the highest pace since April 2012 (-JPY2632bn or $25.7bn), while also selling foreign bonds at a high pace (-JPY2021bn or $19.7bn. This was the fifth month in a row of banks. foreign bond selling, while recent MOF weekly datasuggest their selling of foreign bonds has been slowing lately.
Pension funds: Pension funds accelerated their investment in foreign assets in April. They purchased JPY510bn ($5.0bn) of foreign bonds, the biggest amount since 2005 when data begun (Figure 3).
The biggest pension fund, GPIF, is expected to change its target portfolio to add more foreign assets, and smaller pension funds may have already started increasing foreign asset exposures ahead of the expected GPIF announcement. Pension funds continued selling domestic equities, albeit by a small amount (-JPY94bn or $0.9bn)." - source Nomura
Another illustration from the bond buying spree from Japanese investors can be seen below coming from the same Nomura report:
As per our last post "The Vortex Ring":
"It is worth noting Japanese have bought a record $86 billion of US treasuries in the last 12 months according to Bloomberg data. It is important to note as well that for the Japanese investors, adjusted for living expenses, US treasuries still yield more this year than Japanese government debt than at any time since 1998, as per monthly data compiled by Bloomberg showed recently. So if the GPIF starts deploying its "allocation firepower" in June, maybe you ought to cling to your US treasuries a little bit longer, and maybe after all the Belgian central bank is just a very "astute" investor after all..."
We still sit tight in the deflationary camp, meaning you should go with the "flow" and expect further compression in core government yields and spread in this "japonification" process.
Key take aways from our last post "The Vortex Ring" are as follows:
-Don't sell your US Treasuries yet (you might want to "front run Godzilla", namely Japan's GPIF),
-Play the rebound of the Nikkei with weakening yen again in June (but first short term pain has been and is on the cards)
-Don't expect QE yet in Europe.
"We spend more time developing means of escaping our troubles than we do solving the troubles we're trying to escape from." - David Lloyd, British artist.
Stay tuned!
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