The minutes of the Fed's March policy meeting released on April 7 show that it may start to shrink its balance sheet from May, with a monthly reduction of up to $95 billion. The minutes of the meeting show that the russian-Ukrainian conflict continues to put further pressure on deepening US inflation and has expanded across the US economy, and on April 6, The Fed's "number two" director Brainard, who is regarded as a dovish one, suddenly turned hawkish.
Federal Reserve Headquarters Building
Immediately after, Fed Governor Bullard further said on April 8 that the Fed was lagging behind the situation, and that the remaining six meetings of the year should raise interest rates by 50 basis points each time, and as soon as his voice fell, the market immediately reacted, causing an uproar and putting further pressure on the US Treasury market.
We note that the Fed's faster and earlier tightening of monetary policy also allowed the price of US Treasuries to continue to expand the decline, on April 8, the US Treasury once again suffered a large-scale sell-off, us Treasury yields of different maturities reached or approached the high point since the beginning of 2019, extending the upward trend in the past two weeks (for specific data, please refer to the chart below), the US Treasury yield is inversely proportional to the price, and the rise in yields represents that the selling volume of US Treasuries is greater than the purchase volume.
On April 8, the benchmark 10-year Treasury yield hit a three-year high of 2.647% (representing the market's inflation expectations for the next decade). Rising 3.8 basis points, the two-year-10-year Treasury yield spread widened further by 18.72 basis points, and the market, after absorbing expectations that the Fed will raise interest rates more sharply, is more focused on the speed and scale of the balance sheet reduction program, which Goldman Sachs and Deutsche Bank both say mean that the US economy will cause a recession in 1-3 years, and experience shows that the inversion of the US Treasury yield curve is usually the prelude to a recession.
According to the stress test model provided by the MSCI risk management team, if U.S. inflation exceeds 10% and the economy declines, the return on investment in U.S. Treasuries could fall by around 13% to 5%, and Goldman Sachs also raised its forecast for 2022 Treasury yields, citing broader and persistent price pressures and a more hawkish shift by the Fed.
From the perspective of gold investors, although the Fed's faster tightening of monetary policy offsets the safe-haven demand for gold caused by the possible imposition of new sanctions on Russia in the West, the CEO of Barrick Gold said on April 7 that if the Russian-Ukrainian conflict continues, it is good for gold, and the Fed's current interest rate hike is not enough to push the real interest rate of the 10-year US Treasury to positive (currently about 5.32%).
Historical data shows that in the tail events related to major regional conflict crises, gold is often able to have a positive response, although the price of gold will fluctuate sharply during this period, but it will remain high in the months after the event, because, in the early stage of commodity inflation, gold's changes tend to lag behind commodities, but eventually gold will outperform commodities, and gold may play the role of "catch-up" in 2022 in the case of the Russian-Ukrainian conflict affecting inflation climbs and supply chain problems. The latest data is feeding back this trend.
A freighter was piled high with boxes of gold
According to the world gold council's report released on April 7, global gold-backed ETFs (exchange-traded funds) recorded a net inflow of 187.3t in March (81.6t in the first two months of this year), the largest since February 2016, although the stock market rebounded significantly during the month and the US dollar strengthened, but the market's concerns about rising inflation and the ongoing Russian-Ukrainian conflict supported the flow of funds into gold.
Among them, in March, the net inflow of Asian funds was 2.6 tons, and the demand from the Chinese market was the main driving force, and in the first two months of this year, the Asian gold-backed ETFs flowing into China accounted for more than 60% of the total inflows, which surprised investors, and according to customs data, in 2021, China increased gold imports significantly, with a quantity of up to 818 tons, an increase of 120 tons over 2020.
For example, in recent weeks, there has been significant sales growth in a number of gold products in the Shanghai gold retail market. According to a report cited by the US financial website Zerohedge, thousands of tons of gold may have arrived in the Chinese market since the global central bank did not report some data on the acquisition of gold reserves to the IMF or the World Gold Council. However, gold imports from Switzerland and Dubai from switzerland and Dubai in the Chinese market are not always declared every time, according to the US media, since 2000, more than 6700 tons of gold have entered the country through the overseas market alone, and Switzerland is the world's largest gold refining center and transshipment center.
Then, according to the US financial website Zerohedge quoted Swiss and Dubai customs data on April 5, Switzerland and Dubai's gold exports to China surged to the highest level since 2018, of which about 200 tons of gold have been transported to China in batches from Europe and the United States in March (please refer to the figure below for specific data details), which also means that since 2021, at least 1018 tons of gold have arrived in batches to China.
The survey report published by the association shows that gold as an effective and unique liquidity risk diversification and hedging means for global central banks, more than 21% of global central banks plan to continue to increase their gold reserves in the next two years, and they have purchased 463 tons of gold in 2021, an increase of 82% over the previous year, and 39% higher than the average in the last five years, setting a record for the fastest purchase rate since the decoupling of the US dollar from gold, it is clear that gold is no longer a marginal asset. The financial and monetary properties are being re-presented, and the following chart of data provided to us by the World Gold Council and the International Monetary Fund is giving feedback on this view.
According to reuters quoted in the report on April 7, the trend of global central banks selling US Treasuries to replace non-US monetary assets such as gold will continue to seek diversified international reserves and weaken new demand for US Treasuries, and the current key moment when the Federal Reserve, the largest holder of US Treasuries, plans to cut its US Treasury holdings by $95 billion per month starting in May, which is also the core reason why US Treasury yields have risen sharply in the past four weeks and the actual US Treasury yields after deducting inflation are negative. This means that U.S. bond investors will have to take more risk, and theoretically there is a possibility of reversing interest.
Subsequently, according to the views of some traders, economists and Wall Street institutions latest cited by the US quartz website on April 6, although the Fed has begun to raise interest rates and has just hinted that it will support a sharper interest rate increase, it still cannot make the real yield of the US Treasury into a positive data value, and as the real yield of the US Treasury has been in negative range for a long time (after deducting inflation), this also means that the high inflation in 41 years has hedged the interest cost of the United States, and there is a possibility of hidden default.
This also makes it very likely that global central bank investors at the cornerstone level of US Treasuries, including Japan, China, the United Kingdom, France, Canada, India, Australia, Russia, Turkey, Germany, etc., will continue to net reduce their holdings of US Treasuries, although a large selling of US Treasuries is a risk of loss for US Treasury investors, but if the Russian-Ukrainian conflict continues to increase the pressure on the US inflation risk, it is not excluded that there is a possibility of clearing US Treasuries.
In fact, from a longer-term time frame, our team according to the US Treasury department released the last five years of data statistics found that the total amount of us treasury net purchases by the global central bank is not proportional to the number of US dollars printed in the United States, the specific trend please refer to the following global central bank purchase of US debt data chart in the past five years, because, with the supply of US bonds continues to rise, high inflation for several months, so that the dollar bond assets depreciate, and the implementation of a very low interest rate policy, the real yield is in negative value, resulting in a decline in attractiveness.
So, from that perspective alone, because U.S. debt is the foundation of the dollar, but as U.S. debt and inflation rise at the same time, the role of the dollar in the money market will be reset when those smart monetary authorities really need to address U.S. debt and inflation risks. David Stockman, the father of Reagan economics, again warned in an April 6 interview with CNBC about current U.S. inflation, fiscal deficits, and the Fed's monetary policy, saying that according to the Austrian economists' theory of the business cycle, the Fed cannot control inflation because it is itself the driving force behind inflation and debt.
A corner of the U.S. printing house
Then, on April 7, former U.S. Treasury Secretary Mnuchin warned about inflation, which has remained high for 41 years and supply chain shortages in the U.S. market, fearing that it could further exacerbate inflation and could easily bring the 10-year Treasury yield, which is the anchor of global asset prices, to an easy 3.5%, which has been significantly reduced by the market for a long time. (End)