Quantitative Tightening Debunked (briefly)

As a former central bank salesman that traded with many of the world’s largest central banks across US Treasuries, Euro Govts and Aussie Government debt I have a unique insight into how these clients actually think and trade.
Angus Coote

Jamieson Coote Bonds

[Screen Shot 2015-09-24 at 11.40.51 am.png]There have been some passionate articles written on how Quantitative Tightening is going to cause the mother of all sell offs in bond markets around the globe. These articles fail to address the reasons as to why reserve managers are selling bonds. Weakening global growth is forcing reserve managers to sell bonds to protect currencies from large capital outflows. Here are some facts that have been neglected by most observers

  1. If you plot Chinese selling of USTs against 10yr treasuries you will find that yields actually rally as China (SAFE) sells - see graph

  2. As long as a reduction in China’s US Treasury holdings takes place in conjunction with difficulties within the Chinese economy this is actually bullish for US Treasuries not bearish in a flight to quality trade from the private sector globally.

  3. Chinas (and most Central Banks) holdings of US Treasuries are short duration securities with 74% being 5yrs or below according to recent TICS data. Most commentators have been talking about China selling 10yrs in massive size. Its inaccurate.

  4. Short dated bonds are easily absorbed by many investors, banks, insurers etc etc

  5. Central Banks are cautious by nature and are proactive rather than reactive. China will be stock piling liquid assets to defend the currency against potentially larger capital outflow

  6. Selling of USTs has been orderly

Lastly if there were a disorderly sell off in the US bond market forcing yields higher do you really think the FED would stand back and watch from the sidelines as all their hard work since the GFC is unwound by foreigners slamming the market? QE4 anyone?

Angus Coote
Angus Coote
Jamieson Coote Bonds

Angus established Jamieson Coote Bonds with Charlie Jamieson in 2014. He started his career with JPMorgan in London, before working at ANZ and Westpac, where he transacted the first ever Australian Bond trades for several large Asian Central Banks.


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