Investors may claim to be taking the prospects of a Fed rate increase in stride, but something has clearly triggered the selling of mid to long term Treasury bonds. It was reported yesterday that PIMCO's Total Return Fund, one of the world's largest holders of US Treasuries, unloaded a sizable portion of its stake in Treasuries, lowering their share of the Fund's assets to 8.5% from 23% this past April.
With $107 billion in assets, this would represent selling of roughly $16 billion, hardly enough to move the needle on a $17 trillion market. En masse, though, with similar moves by other money managers and sovereign investment funds, yields are quickly heading higher. It's unlikely that pension funds and endowments are forming much of the selling, with asset allocation models proscribing certain levels of fixed income allocation. The Fed, while off its campaign of gobbling up a substantial share of new UST issuance, is clearly not a seller either and, in fact, continues to buy each month to replace maturing UST holdings.
Many look to China and Japan, as the largest holders of US Treasury bonds and question their level of buying and selling. The largest holder of US Treasury obligations, however, is actually the Social Security Trust Fund, with roughly $2.8 trillion held (albeit of a special class). Thus, just to meet the targeted date of insolvency of Social Security of 2033, the US Treasury must first raise $2.8 trillion from taxpayers in order to meet the obligation of maturing UST securities. But that's another story.
What's interesting about the recent rise in interest rates is what's happened to the relative value of US Treasury bonds and the sovereign debt of other developed economies. With the UST 10-year trading near 2.50%, its yield represents a whopping 150 basis points over the German BUND, now also rising rapidly in yield. Moreover, UST is trading at higher yields than all EU nations and Japan, save the exception of Portugal, whose bonds yield only slightly higher.
All of this activity, occurs following the first limited bond buying by the ECB begun last March, as part of a 19-month effort to inject $1.2 trillion into the European economy. It's hard to imagine how that plan won't drive yields far lower in months ahead, including those of US Treasuries, now at historic wide spreads to European debt. But in a world where economies are administered by central banks, rather than market based, anomalies like this latest tantrum can and may continue.
