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Sancho Panza

$1.6Trn Downswing In Bond Demand Thus Far In 2013

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https://markets.jpmorgan.com/research/EmailPubServlet?action=open&hashcode=v6rena6q&doc=GPS-1215223-0.pdf

'Bond fund buying by retail investors collapsed from $855bn in 2012 to $162bn YTD, representing a massive $700bn swing.

This swing, of rolling two quarters vs. the previous two quarters, is very extreme

by historical standards

We can go further back, to 1990, using US-domiciled bond funds only.

Figure 2 also shows that when bond outflows reach extreme levels, as they

did this past summer, a quick rebound followed afterwards

Institutional investors such as reserve managers also

reduced their bond buying sharply this year vs. 2012. This is revealed in

high frequency data on Fed custody holdings. The face value of marketable

U.S. government and federal agency bonds (ex. Tbills) held in custody by the

Federal Reserve Banks for foreign official and international accounts is up by

$47bn YTD vs. $187bn last year. In fact, reserve managers appear to have

turned net sellers in the summer, partly due to the EM credit crunch that forced

several central banks to sell reserves to defend their currencies.

August. The YTD flow into foreign bonds

remains in very negative territory. Figure 4 shows YTD selling of around

$80bn of foreign bonds, which is rather exceptional. There has never been a

full year during which Japanese investors sold foreign bonds at least since

2005. A mere normalization of this flow to the historical low levels of

2006/2007 would require buying of $120bn of foreign bonds by Japanese

investors between now and year end

In total, an update of bond demand by retail investors, G4 commercial banks

and reserve managers shows a massive swing of $1.6tr this year vs. 2012,

compared to an increase in bond purchases by G4 central banks of $900bn.'

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Is this the bull bond market that has ended after 30 years that there are so many articles about online?

If it is collapsing, what does this mean for interest rates/house prices and won't the government just do something to stop it collapsing?

Sorry I know nothing about bonds or what they mean to the economy, hence the questions.

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We've been saying on here for ages that we don't undertstand why poeple are buying bonds that pay significantly less than inflation and have no potential upside, looks like fund amangers have started thinking the same thing.

Up go those yields B)

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Is this the bull bond market that has ended after 30 years that there are so many articles about online?

If it is collapsing, what does this mean for interest rates/house prices and won't the government just do something to stop it collapsing?

Sorry I know nothing about bonds or what they mean to the economy, hence the questions.

It hasn't necessarily ended until the trend lines have been broken.At the moment,they haven't been broken.

Generally speaking higher IR's in the bond markets mean more expensive mortgages as has been witnessed over the last 5/6 months in the US.

The govt can QE to try and reduce IR's but each round seems to have less effect than the last.

The fat lady may be warming up at the minute but she isn't warbling.

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We've been saying on here for ages that we don't undertstand why poeple are buying bonds that pay significantly less than inflation and have no potential upside, looks like fund amangers have started thinking the same thing.

Up go those yields B)

There was an interesting discussion the other day about this.The monthly figures can be a little misleading but there appear to have been some longer term outflow trends for a while now.

Key marginal buyers do appear to be heading for the exits don't they-the Japanese,retail,foreign CB's?

http://www.bloomberg.com/quote/GUKG10:IND

2.93%

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It hasn't necessarily ended until the trend lines have been broken.At the moment,they haven't been broken.

Generally speaking higher IR's in the bond markets mean more expensive mortgages as has been witnessed over the last 5/6 months in the US.

The govt can QE to try and reduce IR's but each round seems to have less effect than the last.

The fat lady may be warming up at the minute but she isn't warbling.

However, anybody making long term decisions on an asset class would not be buying bonds at the current levels. Which then leaves the bonds a play thing for short term money - making it potentially much more volatile - even even central bank manipuation and jabber.

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However, anybody making long term decisions on an asset class would not be buying bonds at the current levels.

I wouldn't say they're good value by traditional metrics but people buy them to offset all manner of risks which would fall outside those parameters.

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Kuroda's managed to strong-arm JGB yields down again after they spiked earlier this year.

10y+JGB.PNG

He's had to purchase an extraordinary number to do it, mind.

BOJ+holdings+of+JGBs.PNG

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1379938282[/url]' post='909396948']

http://www.infowars....ttle-while-too/

I think we are way past any point of return now.......

On reading this and for the authors arguments to stand up, he asserts that money is being printed exponentially. Is there any evidence for this other than presumambly extrapolating the data from the graph for previous years and debatable whether that is even correct thing to do?

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Bonds are all about a long-term steady return. I suspect retail investors have long been out of government bonds, the ones that have been systematically trashed since 2009, but corporate bonds still work if the price is right.

One thing that's happened recently is the rise of a new asset class. Infrastructure funds have the long-term-secure-income attributes that attract investors to bonds, and seem to have taken a bite out of the corporate bond market. Indeed, they may be heading bubble-wards.

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On reading this and for the authors arguments to stand up, he asserts that money is being printed exponentially. Is there any evidence for this other than presumambly extrapolating the data from the graph for previous years and debatable whether that is even correct thing to do?

He says the US money supply is beginning to grow at an exponential rate, which is undeniably true. Extrapolating that into a dollar hyperinflation is probably mistaken, and he's almost certainly wrong about a loss of confidence in the dollar. The role it has as the global reserve currency gives it unique privileges (see Triffin's Dilemma), the real problem going forward for the rest of the world is likely to be a scarcity of dollars as the US trade deficit contracts (currently less than half what it was in 2006) rather than a surplus. Export nations need dollar strength to maintain the value of their exports. In supply and demand terms that means America 'exporting' fewer dollars. We've already seen the consequences of this being felt in places like India and Turkey. As quasi-reserve currencies the yen, the euro and sterling are also vulnerable to currency/credit crises and collapse. If you don't possess the reserve currency you can't print money and have it accepted as payment. The US dollar should rise in value for years to come as one-by-one these pretenders are cast aside.

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He says the US money supply is beginning to grow at an exponential rate, which is undeniably true. Extrapolating that into a dollar hyperinflation is probably mistaken, and he's almost certainly wrong about a loss of confidence in the dollar. The role it has as the global reserve currency gives it unique privileges (see Triffin's Dilemma), the real problem going forward for the rest of the world is likely to be a scarcity of dollars as the US trade deficit contracts (currently less than half what it was in 2006) rather than a surplus. Export nations need dollar strength to maintain the value of their exports. In supply and demand terms that means America 'exporting' fewer dollars. We've already seen the consequences of this being felt in places like India and Turkey. As quasi-reserve currencies the yen, the euro and sterling are also vulnerable to currency/credit crises and collapse. If you don't possess the reserve currency you can't print money and have it accepted as payment. The US dollar should rise in value for years to come as one-by-one these pretenders are cast aside.

Yes, I'd expect the dollar printing to initially just export the bulk of the resulting inflation to other economies that peg to the dollar or have weak currencies (the printing will provide upward price support for assets/commodities priced in dollars).

It's only once foreigners start to cut the link with the dollar to protect themselves that we'll see all the dollars start to flow back into the US economy and stoke runaway inflation.

The BoE on the other hand has to be mindful of the dangers of a rapid currency collapse which would work its way into price increases very quickly should they over-egg the money printing pudding.

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Yes, I'd expect the dollar printing to initially just export the bulk of the resulting inflation to other economies that peg to the dollar or have weak currencies

Obviously what QE does get out into the wild, can have massive effects, push up values of asset classes, from those willing to borrow / pay higher. Not exactly on high volumes. At the margin. And perhaps leveraged many times over. Housing and other markets. And sellers cushioned from needing to sell, for the moment.

If this is true, I still think it's 'not so bad' and maybe the banks better positioned when the correction does come. Banks able to lend money to good risks, to buy at houses/business at much lower prices, at more realistic lending rates, to give lenders good profits on 25/30 year mortgages. The young replacing fat-equity-housing-rich old.

To be sure, some bankers believe that the Fed's quantitative easing has done little to help them, and its ending will have little impact on them.In fact, while the Fed has pumped about $2.8 trillion into the financial system through nearly five years of asset buying.

Bank excess reserves deposited with the New York Fed have mushroomed from less than $2 billion before the financial crisis to $2.17 trillion today. In essence, roughly two-thirds of the money the Fed pumped into the banking system never left the building.

more at Reuters, Thu Sep 19, 2013, http://www.reuters.c...E98I07B20130919

Hedge funds returning money to investors, implication being they can't see any profitable opportunity out there. Perhaps they didn't know about marketoracle / George Osborne and the non-bubble in UK, with house prices set to rise.

http://www.reuters.c...E98N0P420130924

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To be sure, some bankers believe that the Fed's quantitative easing has done little to help them, and its ending will have little impact on them.In fact, while the Fed has pumped about $2.8 trillion into the financial system through nearly five years of asset buying.

Bank excess reserves deposited with the New York Fed have mushroomed from less than $2 billion before the financial crisis to $2.17 trillion today. In essence, roughly two-thirds of the money the Fed pumped into the banking system never left the building.

more at Reuters, Thu Sep 19, 2013, http://www.reuters.c...E98I07B20130919

Excess reserves (ie what QE creates) won't leave the building. Reserves don't leave the building, by definition they are balances at the Central bank. That doesn't mean they haven't been spent though. They could be used a million times over, but they'd still be left in the Central bank at the end of it, just in someone else's account. The central bank reserve balance shows nothing about the amount of transactions those reserves were involved in.

Glad to see a financial journalist has a good of the system they're writing about.

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Excess reserves (ie what QE creates) won't leave the building. Reserves don't leave the building, by definition they are balances at the Central bank. That doesn't mean they haven't been spent though. They could be used a million times over, but they'd still be left in the Central bank at the end of it, just in someone else's account. The central bank reserve balance shows nothing about the amount of transactions those reserves were involved in.

Glad to see a financial journalist has a good of the system they're writing about.

You could be correct. Not enough information in the article and I can't find my detail elsewhere. The excess reserves could be counter for new or existing debt that's been financed, the corresponding balance sheet for other obligations in play. Encumbered.

Just realised the link to the Reuters story was broken. Here is a working link: http://www.reuters.com/article/2013/09/19/us-usa-fed-banks-analysis-idUSBRE98I07B20130919

The story also says it's a challenge to find credit-worthy borrowers who want to borrow.

Banks say they are more than happy to lend now, and that the real problem is that customers are less interested in borrowing.

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He is.

Well it is opaque, and complicated. Some more digging around and I still am not certain much of the QE has escaped. Banks still timid to lend, many cautious businesses not prepared to spend their reserves in this market, US mortgage applications well down to a 5 year low, so many house purchase transactions of past few years being for cash, those hunting yield, also pulling in a lot of foreign money.

Could be plenty of jawboning behind the stimulus, and only a little QE escaped, massively leveraged of course by some of the entities who've taken advantage of it, via loans.

I'm still clinging onto a theory the banks are going to be better positioned, and want to lend when asset prices crashed/lower, to new entrants, in many sectors, whilst pursuing debtors. If and when the squeeze comes. This June 2013 story looks at the ballooning deposits with the Fed, although uses lower figures. Unless it was only $1 trillion in June 2013, and since doubled.

June 2013.

"Many institutions have still seen deposits at the central bank balloon as more liquidity has piled up on their balance sheets in recent years," analysts Marshall Schraibman and Robb Soukup of bank research firm SNL Financial wrote in a report last week.

In the past month or so, interest rates have begun to rise, mostly driven by concern of what the Fed might do and when, now that the economy is improving. But most of that discussion has been around quantitative easing and the Fed's $3.1 trillion bond portfolio. But what's not talked about too often is the other hurdle the Fed faces in exiting its stimulus program -- how to deal with all the cash the banks have parked at the Fed, and what happens to that money.

In part, the two issues -- the bond portfolio and the bank cash -- are sides of the same coin. When the Fed buys bonds, it's handing over money to someone, be it a bank or investors. And some of that money undoubtedly ends up deposited at a bank, which has to put it somewhere. When the Fed decides to sell off its bond portfolio it will be essentially taking that cash back, and, poof, the bank deposits will disappear.

http://finance.fortune.cnn.com/2013/06/12/federal-reserve-bank-deposits/

Then again there's this PDF from the Fed, which suggests banks could lend massively (now and in during the past few years), and the reserves it holds with the Fed not fall, due to the math of things within the system.

Why Are Banks Holding So Many Excess Reserves - July 2009

http://www.newyorkfed.org/research/staff_reports/sr380.pdf

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It's not that opaque.

If the central bank buys a 100m gilt from bank A in a QE operation there are now 100m of excess reserves. If bank A buys 100m of IBM shares from bank B that payment will ultimately end up settling by moving those reserves to bank B's account, so the system will has 100m of excess reserves even though 100m of shares changed hands.

If bank A instead decided to loan Terry 100m, at the point it told Terry he had 100m in his account its balance sheet would grow 100m. The bank would still have 100m of excess reserves and the world would have 100m more credit. It's only at the point Terry buys a 50m Hyde Park apartment from Fred, who banks at bank B, that the reserves would go anywhere. Not because they've been lent, but because they'd settle the 50m transaction.

Terry would have 50m, Fred would have 50m and each of the banks would have 50m excess reserves so the excess reserve balance would be 100m.

Reserves are there not to be lent but to facilitate smooth operation of the financial system. They will always be there if needed and even after transactions they still exist, just in different accounts.

As such excess reserve balances show nothing about transaction activity.

This paper explains reserves nicely.

http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf

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Governments also create deposits when they run budget deficits because they are putting more money into the public's bank accounts than they are taking out.

Not exactly true - only true of the value of government bonds held by primary banks.

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