Bond Selling Seems Forced

 | Aug 22, 2013 | 2:48 PM EDT
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It's worth noodling on who is selling bonds right now, because it sure does seem forced. With the help of my colleague, Matt Horween, let me give you some thoughts on the natural sellers and why they might be selling.

Foreign governments own a huge percentage of $15 odd trillion in U.S. government debt -- perhaps as much as 45%-50% of all bonds. China alone owns $1.2 trillion in bills notes and bonds. Japan owns almost a trillion in bonds. Brazil has $200 billion. Wow, those are some real weak holders. China's got to be dumping like mad and that could be a huge source of repatriated dollars for a country that's starting to awaken, as the inching higher Baltic Freight index shows and the purchasing manager's index, proves, given that it went north of 51 when last month's reading was 47. How can Brazil maintain its holdings right now? The country is totally strapped. And tell me that Japan doesn't want some of that money-- although they sure don't want to do anything to move up the yen, which is what would happen if they repatriate too aggressively.

Plus, why not sell? These countries aren't watching Abercrombie & Fitch (ANF)plunge off of a horrendous quarter and terrible guidance. They aren't saying "Wow, Macy's (M) is bad and Target (TGT) is worse." They are looking at weekly unemployment claims and saying, "Gee, things are heating up there. I want out." Or they are saying, "I can't take this parlor game of tapering or no tapering -- let me just book my huge gain and move on."

Remember, they might sense a real bargain in the euro. Two years ago, we thought the euro was going away. Now, given the newfound strength of even the periphery countries, you have to think that owning bonds denominated in euros could be a better play than dollar denominated bonds. Suddenly there are big bond market alternatives that make sense to savers.

And who can blame them? We have had a holiday from government dysfunction but that holiday is about to end. And does anyone even think for a minute that anything's changed? The wrangling in Washington is terrible for the bonds and, of course, it has caused all of the big declines in the stock market for the last few years.

It's coming back.

The bond market decline may seem like panic-selling to many Americans -- and there is an element of that, for sure -- but these are seasoned holders who have made fortunes and they don't want to give them away. They may have missed the bottom but they are nowhere near the top. They don't care if rates go back to 2.7%. They just want to take the money back, go elsewhere or ring the register. In fact, there are so many more reasons to sell than to buy, that you can see how bonds can overshoot any economic activity -- as I think they have already.

The natural sellers are headed home. Who can blame them?

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