I believe zerohedge was the first to report that PIMCO's Bill Gross, the Bond King, recently dumped his U.S. treasuries holdings—all of them.
And many thought Bill Gross was only posturing when he said he is getting the hell out of dodge. Based on still to be publicly reported data by Pimco's flagship Total Return Fund, the world's largest bond fund, in the month of January, has taken its bond holdings to zero...
The offset, not surprisingly, is cash. After sporting $28.6 billion in "government related" securities, TRF dropped to $0.0, while its cash holdings surged from $11.9 billion to a whopping $54.5 billion...
In his most recent newsletter, Gross describes who holds our bonds.
What an unbiased observer must admit is that most of the publically issued $9 trillion of Treasury notes and bonds are now in the hands of foreign sovereigns and the Fed (60%) while private market investors such as bond funds, insurance companies and banks are in the (40%) minority. More striking, however, is the evidence in Chart 2 which points out that nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns.
Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t?
Here's an alternative view of the Fed's Z1 Flow of Funds data from Global Macro Monitor's Is this Why Bill Gross Dumped Treasuries?
The chart [below] illustrates how QE2 flushed domestics out of Treasuries and effectively funded 63 percent of the budget deficit in Q4. The Treasury is prohibited from directly selling bonds to the central bank, but effectively finances the government through POMO.
Given that a large portion of the Rest of World category are central banks recycling balance of payment [trade] surpluses, it’s likely that 90 percent of the U.S. budget deficit in Q4 was funded by central banks.
You think this may have anything to do with what’s happening in the commodity markets? That is, the central banks’ printing presses providing the fuel for speculators?
This chart was re-formatted by Tim Iacono.
I think this situation, even if it is temporary and ends with QE II, should be taken at face value. The Federal government issues debt, and the Federal Reserve buys 70% of it. The other 30% is purchased by the central banks of the trade surplus countries. These countries are "recycling" excess dollars.
Future historians, discerning the causes of future calamities, will note that by the 4th quarter of 2010, and during the 1st quarter of 2011, the United States was printing money to cover its debts. I first covered these issues in The Biggest Ponzi Scheme Ever Conceived. Gross would like to know who will buy Treasuries after the latest round of quantitative easing ends. Who will it be?
I don’t know. Reserve surplus sovereigns are likely good for their standard $500 billion annually but the banks are now making loans instead of buying Treasuries, and bond funds are not receiving generous inflows like they were as late as November of 2010. Who’s left? Well, let me not go too far. Temporary voids in demand are not exactly a buyers’ strike. Someone will buy them, and we at PIMCO may even be among them. The question really is at what yield and what are the price repercussions if the adjustments are significant...
What I would point out is that Treasury yields are perhaps 150 basis points or 1½% too low when viewed on a historical context and when compared with expected nominal GDP growth of 5%. This conclusion can be validated with numerous examples: (1) 10-year Treasury yields, while volatile, typically mimic nominal GDP growth and by that standard are 150 basis points too low, (2) real 5-year Treasury interest rates over a century’s time have averaged 1½% and now rest at a negative 0.15%! (3) Fed funds policy rates for the past 40 years have averaged 75 basis points less than nominal GDP and now rest at 475 basis points under that historical waterline.
I don't know how events will unfold in the bond market over the next year or two. After the recent disaster in Japan, there was another "flight to quality" (or "flight to safety") as investors once again bought up Treasuries.
Events related to the devastating earthquake in Japan superseded all else in the capital and currency markets last week, even sectors with no discernible connection to the disaster, as investors fled anything hinting of risk for the safest harbors.
One of those was the U.S. Treasury market, where prices rallied and yields slid sharply in the classic "flight to quality" trade. Ironically, that was the reverse of the initial reaction right after the Sendai disaster on Friday, March 11, when the fear was that Japan—the second-largest overseas holder of U.S. government securities—could liquidate a significant portion of its $886 billion cache of Treasuries to pay to rebuild.
Seriously, one must ask at this point what the words "safety" and "quality" mean in the year 2011. Does it strike you that debt which is mostly covered by money printing is particularly safe? Or that it's a quality investment? As opposed, let's say, to hard assets. T-bills are safe in the very short term, which is what most people think about, but certainly not over the longer haul, as we watch the dollar turn into toilet paper.
In this fiat money world of ours, a world of abject economic and monetary policy failure, the safest bet is the Biggest Loser. Where did Keynesian counter-cyclical spending get us? Nowhere! — the Bernank merely blew some new bubbles. Big shocks are coming. Nobody in their right mind could possibly think this bond market nonsense can go on for much longer.