In its latest meeting statement on May 5, the Fed signaled the market's latest currency turn signal as scheduled, raising the benchmark overnight rate by 50 basis points (the largest rate hike in 22 years) while almost exactly in line with market expectations, and gradually shrinking its balance sheet from June.
Powell
It is worth noting that in his subsequent speech, Fed Chairman Powell ruled out the possibility of a 75 basis point rate hike in June, and surprisingly, Fed Governor Bullard, who was defined by the market as a superhawk, did not vote for a more substantial rate hike, which made the market mistakenly interpret the Fed's statement as dovish, which is clearly a foreshadowing for future asset price turmoil, including US stocks and US Treasuries, suggesting that the market risk-taking sentiment is heating up.
While, on May 5, the Fed's dovish statement allowed some of its money to re-enter the Treasury market, such as the two-year Treasury yield, which is most sensitive to the Fed's interest rate outlook, fell 9 basis points to 2.6706% in the end of the session, but the 10-year Treasury yield, which reflects long-term inflation indicators, fell only about 2 basis points to 2.940%.
This suggests that tensions over U.S. inflation concerns remain in the U.S. Treasury market (supported by both the newly released CPI and PCE core price indicators, which continue to hit 40-year highs), as exemplified by Fed Chairman Jerome Powell's latest speech on May 5.
US Core Prices PCE data for March
He said that "inflation has risen unexpectedly, there may be more accidents in the future, and the spillover effect of the Russian-Ukrainian conflict on the US economy is highly uncertain and may cause long-term upward pressure on inflation", which is clear that this will put pressure on US Treasuries, especially in the context of the Fed's formal balance sheet reduction from June (selling 65 billion to 95 billion US Treasury assets), and the latest market data is feedbacking this trend.
According to data monitored by Reuters on May 5, since March 1, the ten-year standard US Treasury yield indicator has accumulated a sharp rise of 112.9 basis points, and the 2-year US Treasury yield has also risen by 39 basis points since April, the largest monthly increase in thirteen years.
According to data monitored by Reuters on May 3, in the six weeks to May 2, the net outflow of funds from the US Treasury market rose to $63.2 billion as us Treasury yields continued to rise. For example, according to data released by the Japanese Ministry of Finance on April 28, Japan has sold a total of up to $60 billion in US Treasuries in the past 13 weeks.
A corner of the U.S. printing house
Meanwhile, according to the latest report released by the US Treasury Department in April, China also sold a total of $26.1 billion in the three months to February (see the chart below for details), which shows that from December last year to February 2022, China reduced its holdings of US Treasuries by US$12.2 billion, 8.6 billion and 5.3 billion US dollars, respectively. As the chart below appears on the U.S. Treasury Department's website, China has reduced its holdings by a total of $49.4 billion in the 12 months to February.
So, as U.S. debt and inflation continue to grow simultaneously, a reset of the dollar role in the money market will occur when smart global investors need to address U.S. debt risk, and while the Fed has raised rates by 75 basis points since March, it still fails to convert the real yield on the 2-year Treasury into positive data, and these are part of the reasons why investors, including China and Japan, have continued to reduce their Holdings.
It should be noted here that due to the two-month delay in the official US Treasury holding report released by the US Treasury (currently only published until February this year), but since the Russian-Ukrainian conflict has continued, the 10-year US Treasury yield has risen from 1.98% at the end of February to the current 2.95% (for specific data details, please refer to the chart below), and the next US Treasury holding report released in March and April is expected to see more dumping of US Treasuries by global central banks.
Immediately after, the US quartz website quoted the analysis of the debt king Gross that because of the fear that the Fed turned to a sharp interest rate hike cycle, as the US interbank offered interest rate rose, the hedging risk was reduced after the pressure on non-US dollar currencies, and more importantly, the inflation that continued to climb at a 40-year high has continued to hit the real yield of the US Treasury into the negative abyss (for specific details, please refer to the chart below), so from this point of view alone, US Treasury investors already theoretically have the possibility of inverting interest, in fact, There are early signs that U.S. Treasuries are being kept away by investors.
Goldman Sachs' April 25 report said U.S. Treasuries are becoming less attractive relative to alternatives and that the de-dollarization efforts of official institutions around the world should see a plunge in foreign demand for U.S. treasuries in the coming quarters.
According to Bloomberg statistics on May 4, since April 20, more than 21 large trading orders for 5-year and 10-year Treasury futures totaling up to 10.6 billion have been sold off, continuing to short U.S. Treasuries (please refer to the chart below for details). This also makes it possible for large institutional investors in cornerstone-level US bonds, including China and Japan, to continue to sell US bonds in the future, especially if the Russian-Ukrainian conflict continues to trigger high US inflation expectations, there is also a possibility of zeroing out US bonds, because the low returns of US bonds may limit their ability to respond to safe-haven events.
Not only that, but also consider that as the dollar's position will inevitably decline, when those smart global central banks need to really address the risk of U.S. debt, the role of the dollar in the financial and monetary markets may be reset, as the chart provided to us by the World Gold Council and the International Monetary Fund shows that the current trend of official institutions around the world selling US Debt in exchange for gold continues.
The World Gold Council also noted in a survey published on April 27 that 21% of global central banks will continue to buy gold in 2022 and will remain a key component of international reserves. In the first three months of 2022, the global central bank's gold reserves increased by 84 tons, and in 2021, the global central bank's net increase in gold was as high as 463 tons, an increase of 82% over 2020.
We also note that according to the latest report of the World Gold Council on 27 April and the statistics released by customs (the data will have a two-month delay practice), China imported a total of 180 tons of gold from January to February 2022 (of which 113 tons in January), and in 2021, china customs announced that the amount of gold imports was as high as 818 tons, an increase of 36% over 2020 (please refer to the figure below for details of imported gold).
Then, according to the US financial website Zerohedge on May 3, citing the latest import and export industry data details released by Switzerland and Dubai Customs (Switzerland is the world's largest gold refining center and transshipment center), since 2021, Switzerland's gold exports to the Chinese market have also increased significantly to the highest level in nearly five years (February and March this year due to the epidemic due to a slight decline), A total of about 209 tonnes of gold arrived in China from Europe and the United States in April (please refer to the figure for details).
This also means that from January 2021 to February this year, coupled with the cumulative data released from the World Gold Council and official customs channels, at least 1207 tons of gold have arrived in Batches to China during this period. (End)