A shift in US Treasury markets

A good analysis of recent activity posted by commenter David Pearson over at Setser:

“Something has really changed. There is a volume effect of Chinese Treasury purchases, and there is a PRICE effect. China was a non-economic buyer of long-term Treasuries. It was price insensitive. Much more so, arguably, than the rest of the market.

Now China is 1) less important to the long-dated Treasury market as a % of issuance; and 2) more focused on the shorter end of the curve.

When a price insensitive buyer steps back from a market, what is the likely impact on the demand curve? At what price (yield) do private savers want to finance $3tr in Treasury issuance?

Its easy to argue that the recent run-up in Treasury bond yields is a result of this price effect. Why didn’t it occur sooner — say, in 4q08? First, it took time for the Fed, through its QE commitment, to eliminate deflation tail risk. Second, Treasury issuance really started to ramp in earnest over the past two months or so.”

I think this lines up well with the evidence we’ve seen over the last few months. A couple of charts that appear to indicate that the “deflation tail risk” is gone are here.   The answer to Pearson’s question #2 is difficult, as the US authorities have conflicting goals.  Issuing massive amounts of debt, and generating inflation(by low rates and quantitative easing).  Generating inflation makes the debt issuance more expensive.


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