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The Treasury Sell-off

It looks like everyone wants to dump their Treasury bonds.

Last week the Treasury Department reported that foreign investors were net sellers of US government debt in April for the first time in seven months. China’s central bank (the largest foreign US creditor) sold off $5.4 billion. Japan sold $14 billion. All together, overseas investors dumped $54.5 billion.

And it wasn’t only central banks unloading Treasuries. Foreign private investors sold $30.8 billion…the highest one-month outflow on record.

That comes on the heels of a rough month for the Treasury market, with a sell-off that started on May 3rd, spurred by a better-than-expected unemployment report. By last Tuesday, Treasury prices had fallen to the lowest point in 14 months. The chart below shows the rise in the ten-year yield (bond prices and yields move inversely, so as bonds sell-off and prices drop, yields rise). On May 2nd, the ten-year yield was 1.63%…last Tuesday it rose to 2.29%.

The flight from Treasuries might have been sparked by decent economic data, but it has been goaded along by the Fed.

The Federal Reserve is the biggest player in the Treasury market, so changes to its $85 billion-per-month bond buying program are going to make an impact. On May 22nd, Fed Chairman Ben Bernanke didn’t quite say no when asked if the Fed might start to taper stimulus by Labor Day: “I don’t know. It’s going to depend on the data”. The market’s response: the ten-year yield shot up to 2.04%.

Bernanke’s prepared statement was carefully worded, and the word ‘taper’ was not used. But ‘taper’ has become a bad word for the bond market – the media has used it freely, and yields have climbed.


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