My belief is the Fed will be foolhardy to raise interest rates in September, with China dumping its treasuries. By selling their US assets, China is forcing interest rates higher, especially on the 10 and 30 year treasuries. The only reason the long bonds aren’t rapidly losing value is that we are in the grips of a new bear market, and stock investors are fleeing to the relative “safety” of bonds. Yet, bonds are failing to reach new highs because of the overseas selling of them.
By the way, China’s dumping of US treasuries has created QT….Quantitative Tightening! In other words, China has acted ahead of the Fed!
But this is QT in the worse way possible because selling tons of long bonds into the open market can create huge pressures on the debt and credit markets as well as equities–in effect, market disequilibrium! In the past, when the Fed raised rates, they would sell short term treasuries into the open market….but never long bonds! This QT by China with the long bonds is doing the work of the FED by raising rates (on the long end of the curve) even before the FED can act at its mid-September meeting. However, the sale of long bonds creates undue pressures on mortgage markets and other longer term markets in this country.
And China holds a lot of our treasuries ( and they can disrupt markets if they sell a lot of these). This is why I own one call on TBT….and I may buy more.
And I am keeping a close eye on gold because investors could suddenly lose confidence in owning bonds…..that could cause a dumping of the dollar and nearly all other assets….so, I suggest to keep an eye on gold for any sudden breakouts.