Heisenberg Report

‘If Someone Powerful Wanted To Push The VIX Up’: Is This Why China Is ‘Halting’ U.S. Treasury Purchases?

How big of a deal was today’s “big” news out of China regarding the future of U.S. Treasury purchases? Well, that depends on who you ask and, to a certain extent, when you ask them.

There’s something invigorating about a notable story crossing the wires first thing in the morning, so the tone of the early chatter out of U.S.-based commentators might well have reflected that glorious moment when the day’s first line of blow, shot of vodka, dose of caffeine starts to work its magic by jogging the old muse.

Upon more sober reflection (and “sober” there depends on how you choose to go about finding your muse in the morning), this might not be as earth-shattering as it seemed at 5 a.m.

Obviously, China will Plaxico themselves if they do anything too rash given the size of their holdings ($1.2 trillion) and as our buddy Kevin Muir wrote in his Wednesday note, “if China had selling to do, [they probably wouldn’t] jawbone down the price of US treasuries ahead of their sales.”

“Do you think they are that naive?,” he went on to ask, before suggesting he would “take the other side of that trade.”

Deutsche Bank agrees. “Because China holds so much in Treasuries, any small action it takes is apt to damage the existing stock of assets and its overall portfolio by more than any flow adjustment is apt to help the country in terms of return or geopolitical gains from some minor diversification,” the bank’s Alan Ruskin writes, in a note out this morning. “In this regard, it would also make sense for China to sell USD assets before talking about selling them.”

Indeed it appears Kevin isn’t the only one willing to “take the other side of the trade”, because the bond selloff mitigated as the day wore on, with yields falling from their morning highs and Treasurys trimming losses some more after a solid 10Y auction.

If you can access it, Bloomberg’s Ye Xie has a good note out suggesting everyone step back and take a breath. “China added $131b in Treasury holdings in the first 10 months of last year, or $13b a month. How much U.S. government securities traded among primary dealers in every single day last year? More than $500b,” he writes, before noting that although “China’s actual purchases may be bigger than the official data because it may have covered its trail in accounts in places such as Belgium, the truth remains that the ocean is just too big for one whale to make a splash, even as large as China is.”

Perhaps, given all of the above, this was nothing more than a reminder from China to Donald Trump that Beijing has an important … errr … “trump” card when it comes to U.S. protectionism.

Now recall the punchline from the second post we penned on this earlier today amid our morning “caffeine” rush:

If you recall, one of the biggest worries in 2018 is that a bond tantrum triggers a multi-asset drawdown as equities fail to reliably diversify (i.e. stock-bond return correlations flip positive) spelling the end of the longest bull run for balanced portfolios in a century.

We’d be remiss if we didn’t note that it would be exceedingly amusing if the catalyst for an end to Donald Trump’s beloved equity rally ended up being China losing confidence in U.S. assets.

In the same Deutsche Bank noted cited above, Ruskin says something very similar. To wit:

At the same time, the multitude of Trump tweets on the US equity market has left a strong impression that the US could quickly waver on trade actions if China shows it has some power to hurt US equities; or (better still for China) if President Trump’s own actions directly hurt US equities. [We have] suggested that low bond vol is at the epicentre of the low vol world, so if a powerful party wants to roil the equity market, and push the VIX up, one of the best routes is via Treasury bond vol.

Nothing further.