The bond market is in go-go-go mode again in early trading Friday. It is difficult to point out a bottom in yields. The 10-year U.S Treasury note is today trading to yield 0.64%, a full 95 basis points below its level on August 21, 2019, and the 30-year UST is trading to yield 1.36%, 71 basis points below its level of a year ago. The yield on the 30-year UST briefly touched 0.99% in March and then dipped below 1.25% in April and August, but really, low rates are not new news. The coupon on that benchmark 30-year UST is 1.38% (the bond itself is trading at $100.42 against its $100 par value,) so investors willingly bought it knowing that they would be receiving those extraordinary low yields for the life of the bond, should they decide to hold it to maturity.
The five-year UST is yielding 0.26% while trading at 99.93 cents on the dollar, an indication that there is no yield to be gained at the front-end of the curve, and that the market believes that it will remain that way for years.
Who is getting hurt by this massive compression in yield? Is there any Grandma left anywhere who still clips her Treasury coupons every six months to pay her bills? I doubt it. But a look at the largest foreign holders of U.S. Treasuries is instructive.
Based on the U.S. Treasury's data, the largest foreign holders of Treasuries are Japan and China, with $1.26 trillion and $1.07 trillion of USTs held as of the end of June, respectively. China tends to draw all the attention, especially politically, but their central bank is only doing what Japan's JCB has been doing for decades. Holding Treasuries to, in effect, offset the very large dollar-based currency exposure that is created by those two countries' large positive trade balances with the U.S. simply makes economic sense.
As usual, though, FOMC Jerome Powell must look at his counterparts at the BOJ (Haruhiko Kuroda) and China (Zhou Xiaochuan) and say "hold my beer". The New York Fed's website shows that as of last week its System Open Market Account owned $6.289 TRILLION of total securities, including $3.691 trillion of U.S. Treasury Notes and Bonds.
Adding the total count from the Fed's Major Foreign holder data regarding Treasuries ($4.142 trillion) and the NY Fed's holdings gets us a figure well in excess of $10 trillion. Without the individual granularity it's impossible to tell what the exact yield is on that tranche of government-held U.S Treasuries, but let me throw out the term "almost nothing" as a qualitative note.
The logical question is: who is hurt by this? Anyone who uses the yields produced by U.S. Treasuries to offset expenses that are increased periodically by inflation. That was the reason Grandma bought those old bonds in the first place, but it seems like a quaint notion. These days bond funds are printing cash because the prices of those bonds really only go up. But can they continue to rise, given that a few more basis points would take yields below zero?
My guess is no. With no yields to speak of, and very little upside left, those managers that depend on producing returns in the bond market are going to be hit. There's only so much leverage that can be used and it, like so many other things, has diminishing marginal returns.
Alphabet's (GOOGL) Google is not particularly helpful in finding the largest private (as opposed to governmental) owners of Treasuries, but these companies do not hide. The easy ones to name are PIMCO, Fidelity, Vanguard, and BlackRock (BLK) . Of those fund colossuses only BlackRock is public, and I think BLK looks like an easy short here. BLK shares have risen about 15% year-to-date and more than 60% from their March lows. Analyst consensus calls for $29.81 in EPS from BLK this year versus $28.48 in 2019. For some reason the market has decided to place a 20x multiple on those earnings.
It's time to short bonds and short BlackRock's CEO, Larry Fink, as well. I think BLK shares are way ahead of themselves here, and I think a short position in BLK is a good hedge against the low returns that Treasury bond holdings will surely produce for the rest of 2020.