Listen, Morgan Stanley wants to know what the hell is up with Bloomberg, because the Wednesday story about China’s alleged plans to “halt or slow” purchases of U.S. debt seemingly contradicts a June story that suggested China is set to increase its purchases.
“When the first story was written in June 2017, 10y Treasuries yielded 2.20% and, apparently, Treasuries were becoming more attractive than other sovereign debt,” Morgan’s Matthew Hornbach writes, in a note dated Thursday, before asking the following: “Now, with 10y Treasury yields at 2.55%, we are supposed to believe that Treasuries have become less attractive relative to other assets?”
Suffice to say Matthew ain’t buyin’ it, as is clear from the incredulity evident in his rhetorical question.
To be sure, he makes some points that are worth reiterating even if they’re self-evident. For one thing, there’s the old “what else are you gonna buy?” argument. More simply: comparable debt (in terms of quality and liquidity) simply doesn’t yield as much and if anything, the cheapening we saw on Wednesday just makes them more attractive.
Hornbach goes on to discuss the PBoC’s recent move to sideline the countercyclical adjustment factor, something we discussed at length earlier this week because, well, because it’s big news if you’re into that kind of thing.
Here’s our annotated chart that shows you how the adoption of the CCA factor affected the yuan, how China attempted to reverse some of the appreciation by doing away with a reserve requirement on FX forwards put in place following the 2015 deval, and the big selloff that accompanied the sidelining of the CCA factor earlier this week:
“After the countercyclical adjustment factor was announced, the CNY appreciated relative to the USD and our proxy for China’s Treasury holdings increased,” Hornbach notes adding that “part of the increase in China’s Treasury holdings in the TICS data could have resulted from the appreciation in bond market prices at that time.”
So that raises questions about whether, now that the counter cyclical adjustment factor has been removed, the yuan will depreciate and China’s stock of Treasurys will fall.
Morgan largely skips over that issue in favor of simply reminding you that China still runs a trade surplus and assuming exporters repatriate the dollars they receive, the PBoC will have to do something with those dollars or else exchange them for other currencies in order to buy non-USD assets. “If China’s central bank keeps the US dollars instead of converting them into other currencies, what does it buy that is (1) cheaper and (2) offers comparable liquidity to US Treasuries?” Hornbach asks. Spoiler alert: Morgan Stanley doesn’t think there are many good options in that regard.
Long story short, Morgan Stanley does not think China is going to stop buying Treasurys let along become an active seller and as for whether we’re entering a bond bear market as Bill Gross predicts, the bank says simple this:
This isn’t the bear market you’re looking for. You can go about your business. Move along.
There was no word on whether Morgan agrees with Gross on the whole “men are also in a bear market” thing.