Something's wrong here. We were told by the smartest people on earth -- I mean isn't that who comes on TV and gets quoted? -- that if the 10-year treasury yield hit 3% we would be in big trouble.
Now that the 10-year treasury goes from 3% to 2.8% is it wrong that people say we are in big trouble again?
I have always thought that where the 10-year treasury trades is a sideshow. We should care about employment. We should care about where short-term rates are. And we should care about trade.
Employment is a proxy for small to medium sized capitalization stocks with domestic businesses only. It can also be a proxy for companies with a heavy U.S. base like the health insurers-think United Healthcare.
But everything else has gotten mixed. They have some Chinese exposure or hope to have some Chinese exposure and those are hard pressed to do well until the trade fracas is resolved.
Let's go back to the treasury situation for a moment. You hear a lot about how the Chinese are going to sell their treasuries as a way to punish the United States. They own about $1.18 trillion as of April of 2018 which is down from $1.2 trillion in 2013 but way up from $727 billion ten years ago.
Now why would they sell? Some of it is because they have to prop up their stock market. The Shanghai index was down 3.8% last night but there were 1023 stocks down more than 10%. Remember, China already had a 5 trillion dollar melt down from the highs. We know that they can support stocks to keep them in the air or just buy them so that might be a reason for them to repatriate beyond retaliation.
Here's a question, though, that must be asked. Go back to the original supposition: how can we be fearful of 3% on the 10-year because it's moved from 2.8% and yet not be happy to get back to 2.8%. I think that the fed funds rate being higher is the worry because there isn't enough inflection in the yield curve, meaning that the 10-year and the 30-year don't yield as much as banks would like because they can't take up their own prime very much.
However, if the Chinese decided to sell their treasuries at the same time, say, as we have a long-dated treasury auction, that should move rates back up so that the banks can do much better. In other words we would actually cheer Chinese selling because it would supposedly impact the curve in a way that makes it more lucrative for the banks.
Now just in case you are really confused let's throw in the dollar. We are supposed to dislike a strong dollar if we want better exports. But I think that a strong dollar signals that the world is betting that the U.S. will stay strong and can weather any trade war. The strong dollar plus the higher interest rates that we have in this country have been a magnet for foreign buyers of the debt, which, again, is why I don't think the Chinese will repatriate. I emphasize all of this because I am in disbelief of what I read and heard this morning about how we better be careful of the Chinese will dump their treasuries.
Yes, I am concerned about targeted tariffs and boycotts by China of our most visible Chinese exporters. But if they want to sell their $1.1 trillion in treasuries as a way to protest and repatriate, I say bring it on.