Hedge Funds Buying Treasuries???

[pcoulter]

Can anyone tell me why hedge funds purchased the bulk of treasuries at the most recent auction? Are they trying to keep long rates down? It is also interesting to note that foreign central banks really decreased their purchases.

[Dubious]

Let a couple more trade balance reports come out . The next one is going to be a blood bath of red - Blade III. Blood coming off the ceilings on that pig.

Be prepared for the game of "props" to end soon.......

A small foreign central bank will start it and when the music stops the idiot will be the one holding USDs.

Boy, Asia got crushed today....good thing I was shorting it....especially Oz. Wow! Like the House of Pain for their supers...jump, jump, jump around. Over the weekend I posted that sucker broke down - .

You want to believe the USDs will remain the reserves foreign currency - but the reality is that will be ending sooner then later.

Don't fight the force, embrace it - love it - cheerish it - profit from it.

Dubious

This makes no sense to me - 20- year dollar yield of 4.8 per cent, would generate 7.9% or $79,000 currently equivalent to Y7.9m.

How do you get 7.9 yield on 4.8%???? That seems to be a ponzi scheme or they are using derivates to death - sounds like the S&L collapese or Fannie Mae, as the case may be . Second off where are you going to get a 20 yr that yields 4.8%??? The 30 yr is 4.88% - I understand yield curve inversion but we are not there yet.

[pcoulter]

Dubious.....

Quoted from the article"

"Imagine an elderly Japanese retiree, with cash savings of Y100m and suppose for simplicity that the exchange-rate is $=Y100. Suppose, further, that our Japanese saver wants only to secure the best possible pension for his remaining 20 years of life, leaving nothing as a legacy to his children (maybe because he did not have any as is increasingly the case). He can do this by buying an annuity, backed by a bond investment either in yen or in dollars. Looking up the annuity tables we find that a yen annuity, based on a 20-year yen bond yield of 2 per cent, would provide an annual income of 6.1% or Y6.1m. A dollar annuity, based on a 20- year dollar yield of 4.8 per cent, would generate 7.9% or $79,000 currently equivalent to Y7.9m.

Thus the Japanese pensioner can increase his initial income by 30% if he buys an annuity in dollars instead of yen. Of course he faces a currency risk, but given the 30% uplift in his annuity payments, he will remain better off as long as the dollar exchange-rate over the next 20 years averages above Y77 (= 61 divided by 79). Assuming a straight-line depreciation of the dollar, that would imply a break-even exchange rate in 2025 of $=Y54. Taking account the time-value of money and the inherent uncertainty about the saver's lifespan, the true breakeven exchange rate is even lower, probably well below Y50. "

[HenryTo]

Link to the data containing the Major Foreign Holders of Treasury Securities:

http://www.ustreas.gov/tic/mfh.txt

Was meant to post that in our commentary this weekend, but inadvertently forgot to do so.

Sure, there has been a six-month decline in Japanese holdings - but based on this data, I think it's still too early to say that the Japanese has stopped buying.

[Dubious]

3% extra yield makes up for the 22% currency lose over the last 3 years from changing Yen to USD???

100 x 3% = 3.00 per year

100 x 22% = 22

After 3 years your 100 would be worth $85.80. A lose of 14.20 on EVERY 100 UDS. So if you had a 100K treasury your initial 100K investment will be worth 85,800K after 3 years....that does not seem to make up the difference???? A currency lose of 22,000 is offset by 3,100 in "extra" interest? In my mind (which is feeble I know) that is a NET NET lose of 14,200. Plus probably a 5% currency exchange commission on both ends of the transaction.

What am I missing here? Please clarify for me where I wrong?


Dubious

[pcoulter]

I believe it has to do with Japanese retirees who want annuities backed by bonds. The difference in yeild between US & Japan more than makes up for the currency loss.

[Dubious]

Banks in Japan do not even pay interest anymore on saving or check accounts. Their 10 year is around 1%. Understand the yield issue....however the currency lose makes the higher yield not look so favorable.

Sort of like the 15% dividend tax rate on the high dividend stocks I have been talking about with their 30% lose in NAV.

It will get to a point where the currency rate loses make the yield gains to painful. Would you trade 34% currency lose in return for 3% of extra yield??? If you changed your Yen in for U.S. treasuries that is what you have been doing over the last 35 months.



That is why they call me....

Dubious

[pcoulter]

In last week's "Outside The Box" (John Mauldin), the essay talks about "Zombie Buyers", mostly aging Japanese who are buying all the treasuries because they'll provide more income over time than the Japanese counter part - even if the dollar falls further.

This just in the weekend's Daily Reckoning:

"According to new research from Goldman Sachs, there's
evidence that the soulless private Japanese investor is no
longer drooling and moaning at the idea of holding
Treasurys...

Dow Jones reports that "Goldman Sachs chief interest rate
strategist Francesco Garzarelli and strategist Hina Choksy
noted...that total net sales of foreign bonds by these
investors so far in 2005 has reached Y6.7 trillion ($63
billion) - the largest three-month decline in holdings
since March 2002. The economists estimate about half of
these sales involved U.S. Treasurys."

hmmmmm

[Dubious]

Henry,

Thank you for updating the link.

I am like an elephant...if it makes me money I do not forget . Thanks for saying that.

To me the market is truly acting like a bear....suck em in on the futures...sell them off around lunch....suck em back again after lunch and sell em off at the close.

Remember that pattern - like Caddyshack be the ball...or the elephant as the case may be.

Keep Ebay - YHOO short at the ready. The taxman be a coming - I read a story where about 60,000-120,000 families work from home using Ebay (and yes they are counted TWICE in the job numbers) .

Have a great day! Be safe and keep your powder dry.

Dubuious

[HenryTo]

Dubious,

Oops. Link revised!

I agree with your view re: the 30-year Treasuries. It is interesting that this fact is not mentioned more often.

Have a great week,

Henry

[Dubious]

Henry,

Welcome to a new week. You first link is bad. But I appreciate the info. I believe the 30 yr treas has turned into a classic collector's item since they are not issued anymore. I believe if new 30 yrs would be issued they would float....and the would float to a "real" price. Right now they are like a semi-classic car...as the years go on they could even get to 1955 T-Bird status!

Just my .02.

Dubious

Quite to oversold rally we got going on here....Yawn. Playing with ABC, GM, IAC, X and LU today....got putted out on Ebay, YHOO. The IRS taxable income story has seem to be surpressed. But would crush those auction areas.

[HenryTo]

Gizmo and Dubious,

Re: Short squeeze on the bonds - check out our latest Sunday commentary at: http://www.marketthoughts.com/z20050327.html
Thanks!

Commercials are way long the 30-year bonds and they just got longer as of last Tuesday. Check it out using the CBOT long form link at the right:

http://www.commitmentoftraders.com/

Have a great week!

Henry

[Gizmo]

HenryTo,

I been thinking there's going to be a massive short squeeze in bond land. Short interest is huge and has been for awhile. I was looking at 103 on the 30 year as a starting point but who knows hedgies may be right.

Any idea where the commercials and small specs are at?

chart of 30 year bond: http://stockcharts.com/def/servlet/SC.web?c=$USB,uu[h,a]daclyyay[dd][pb50!b200][vc60][iUb14!La12,26,9]&pref=G
_________________
Gizmo

[Dubious]

Not to be X files or anything . However I have been told and have read those "Carribean Banking Centers" are actually the U.S. govt buying their own bonds because they do not want yields to jump....which makes sense when you put $60B of debt on sale and only have orders for $40B worth of debt....either you suck it up on the $20B or raise the yield on the whole $60B wad - that is a no brainer. You think the stock market is bad now - have the 10 year go from 4.24 to 5.00% on auction day! Party like it is 1987 again....crash, boom, baa. Private accounts have not passed yet...the fed is throwing all the tricks in their playbook out there...all we need to see now is the flea flicker.... . Like buying the futures where the durable goods orders report came out last week.

Thoughts?

That is why they call me...

Dubious

[HenryTo]

pcoulter,

Link to foreign holdings of U.S. Treasuries:

http://www.ustreas.gov/tic/mfh.txt

It appears that the last time the holdings of U.S. Treasuries by hedge funds (see #4 Caribbean Banking Centers) jumped this much was during the May and June 2004 period - when yields of the 30-year Treasuries made a minor top.

It appears that the hedge funds have been good timers and they are once again trying to call a bottom in U.S. Treasury bonds. Coupled with the other indicators that I am seeing on the government bond market, I definitely would not be short Treasuries right now.

[HenryTo]

This is an article from last Tuesday - thanks for keeping track of this, pcoulter!

------------------------------------------------------------
Breaking News
Dollar firms after strong US capital inflows data

The dollar firmed against the euro Tuesday after a surprisingly strong report on capital flows data eased concerns about the financing of the huge US current account deficit.

The euro eased to 1.3306 dollars at 2200 GMT from 1.3369 late on Monday in New York.

The dollar dipped slightly against the yen to 104.55 from 104.85 on Monday.

Official figures from the US Treasury showed that foreign capital flows were up sharply in January as overseas investors bought more stocks, and central banks increased their purchases of Treasury bonds and notes.

Foreign long-term net capital flows into the United States rose to 91.5 billion dollars in January from a revised 60.7 billion in December. The long-term capital flow figure is the highest since May 2003 and the second highest on record.

Mike Malpede, senior currency analyst at Refco, said the news benefited the dollar because it was widely viewed as indicating that the US is not having difficulty servicing its current account deficit.

However, Kathy Lien, chief fundamental analyst at Forex Capital Markets, said the report also appeared to indicate liquidations of dollar holdings by some Asian central banks. Fears about possible Asian bank sales of dollar-based assets have put pressure on the US currency in recent months.

"Japan was a big seller, disposing 10.2 billion dollars, which was the biggest dumping of US Treasuries in at least six months, the second consecutive liquidation and the fourth month out of six that Japan has been a net seller," Lien said.

"China also bought the smallest amount of US Treasuries in at least six months, increasing purchases by a paltry 0.6 billion," she said.

Some 75 percent of the net flows into US treasuries originated from non-central bank flows -- most likely from hedge funds or hot money -- totaling 22.7 billion dollars, said Ashraf Laidi, chief currency analyst at MG Financial Group. Hot money can flow out just as quickly, Laidi said.

Earlier, the dollar was on the back foot after the market initially viewed US retail sales data for February in a negative light.

Official figures showed that US retail sales increased 0.5 percent in February against expectations of a 0.7 percent improvement, while retail sales excluding