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The strongest buyers of Treasury bonds all lose at once

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(Bloomberg) — Wherever you turn, the biggest players in the $23.7 trillion US Treasury bond market are falling.

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From Japanese pensions and life insurance companies to foreign governments and US commercial banks where they once lined up for US government debt, most of them have now moved away. Then of course there is the Federal Reserve, which a few weeks ago raised the pace of its plans to unload Treasuries from its balance sheet to $60 billion a month.

If one or two of these consistent sources of demand usually bail out, the effect, though noticeable, is likely not a cause for concern. But the withdrawal of all of them at once is an undeniable concern, especially as it comes in the wake of unprecedented volatility, deteriorating liquidity and poor auctions in recent months.

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The upshot, according to market watchers, is that even as Treasuries have fallen the most since at least the early 1970s this year, there may be more pain until new, consistent sources of demand emerge. It’s also bad news for US taxpayers, who will eventually have to foot the bill for higher borrowing costs.

“We need to find a new marginal buyer for Treasuries as central banks and banks in general are coming out of the rest,” said Glenn Capello, who has spent more than three decades in Wall Street bond trading desks and is now managing director at Mischler Financial. “It’s still not clear yet who that will be, but we know they will be more price sensitive.”

To be sure, many have predicted the trajectories of the Treasury market over the past decade, only for buyers (and central bankers) to pounce on the market and prop it up. In fact, if the Fed strays from its hawkish policy inclination as some are betting, the short rally in Treasuries last week could be just the beginning.

But analysts and investors say that with the fastest inflation in decades hampering officials’ ability to loosen policy in the near term, this time is likely to be much different.

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“huge premium”

Unsurprisingly, the Federal Reserve represented the largest demand loss. The central bank more than doubled its debt portfolio in the two years to early 2022, to reach more than $8 trillion.

Fed estimates show that the amount, which includes mortgage-backed securities, could fall to $5.9 trillion by mid-2025 if officials stick to current rollover plans.

While most agree that reducing the market-distorting influence of the central bank is healthy in the long run, it is a stark reversal for investors accustomed to the Fed’s massive presence.

“Since 2000, there has always been a large central bank on the sidelines buying a lot of Treasuries,” Zoltan Pozsar of Credit Suisse Group AG said during a live episode of Bloomberg’s Odd Lots podcast.

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“We basically expect the private sector to step in instead of the public sector, in a period when inflation is as uncertain as it has ever been,” Bozar said. “We are asking the private sector to remove all of these tanks which we are going to push back into the system, without a glitch, and without a huge premium.”

However, if the Fed alone – with the runoff of its balance sheet sent in long telegrams – were to reverse course, market anxiety would be more limited.

it’s not.

Exorbitant hedging costs have preemptively frozen Tokyo’s giant pension and life insurance companies from the treasury market as well. US 10-year yields have fallen significantly into negative territory for Japanese buyers who are paying to dump currency volatility from their yields, even with nominal interest rates rising above 4%.

Hedging costs have risen along with the dollar, which has risen more than 25% this year against the yen, the most in Bloomberg data going back to 1972.

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With the Federal Reserve continuing to raise interest rates to tame inflation above 8%, Japan intervened in September to prop up its currency for the first time since 1998, fueling speculation that the country might need to actually start selling its stock of Treasuries to increase support. yen.

And it’s not just Japan. Countries around the world have been dropping their foreign exchange reserves to defend their currencies against the dollar’s appreciation in recent months.

International Monetary Fund data shows that central banks in emerging markets have actually reduced their stockpiles by $300 billion this year.

This means limited demand at best from a group of price-insensitive investors who typically put about 60% or more of their reserves into US dollar investments.

Peter Bokfar, chief investment officer at Bleakley Financial Group, said on Monday it was dangerous to assume the US Treasury “will eventually find buyers to replace the Fed, foreigners and banks.”

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Banks on bail

Over the past decade, when one major buyer of Treasuries has seemingly receded, others have been there to pick up the slack.

That’s not what’s happening, according to Jay Barry, strategist at JPMorgan Chase & Co.

Demand from US commercial banks faded as Fed policy tightening drained reserves from the financial system. In the second quarter, banks bought the least amount of Treasuries since the last three months of 2020, Barry wrote in a report last month.

He pointed out that “the decline in banking demand was astounding.” “With deposit growth slowing sharply, this has led to a decrease in banks’ demand for Treasuries, especially since the term of their assets has been stretched sharply this year.”

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All of this adds up to a bearish price level, Barry added.

The Bloomberg Index of total US Treasury yields has lost about 13% this year, nearly four times what it was in 2009, and the worst full-year result on record for the measure since its inception in 1973.

However, as structural support for Treasuries faded, others stepped in to offset the slump, albeit at higher rates. Households, an umbrella group that includes US hedge funds, saw the largest jump in Treasury holdings in the second quarter among the types of investors the Fed tracks.

Some see good reason for private investors to find Treasuries attractive now, especially given the risks of tightening Fed policy sending the US into recession, and yields at their highest levels in decades.

“The market is still trying to evolve and see who these new final buyers will be,” said Gregory Varanello, head of US interest rate trading and strategy for AmeriVet Securities. “Ultimately I think it will be domestic accounts, because interest rates are moving to a point where they become very attractive.”

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Big pools of excess savings held in US banks earning nearly nothing will prompt people to switch to the short-term Treasury market, said John Madzier, portfolio manager at Vanguard Group Inc.

“The valuations are good as the Fed approaches the end of the current hiking cycle,” Madzier said. “The question is whether you’re willing to take the risk of a term now or stay ahead until the Fed reaches its policy climax.”

However, most are of the opinion that the background favors higher returns and a more turbulent market. The measure of debt market volatility rose in September to the highest level since the global financial crisis, while the measure of market depth recently reached its worst level since the start of the pandemic.

“The Fed and other central banks have for years been the suppressors of volatility, and now they are actually the ones making it,” said Michler’s Capello.

(Adds analyst comment in paragraph 21.)

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Food commodities are getting cheaper – unlike grocery bills

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Prices have fallen, but rising energy costs and production concerns are keeping costs to consumers high

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Apple is making plans to move production out of China

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in recent weeks, apple a company It has accelerated plans to shift some of its production out of China, the country long dominant in the supply chain that built the world’s most valuable company, say the people involved in the discussions. They say it tells suppliers to plan more actively to assemble Apple products elsewhere in Asia, particularly India and Vietnam, and look to reduce reliance on Taiwanese-led assemblers. Foxconn technology group.

Unrest in a place called iPhone City helped drive Apple’s turnaround. In a giant city within a city in Zhengzhou, China, up to 300,000 workers work at a Foxconn-run factory making iPhones and other Apple products. At one point, it alone made about 85% of the Pro lineup of iPhones, according to market research firm Counterpoint Research.

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Countries split over focus on plastics treaty as UN talks close by Reuters

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© Reuters. A plastic bottle lies on the sand at Macarese Beach, west of Rome, Italy November 21, 2018. (Reuters/Max Rossi)

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By Valerie Volkovici

WASHINGTON (Reuters) – The first round of negotiations on a global plastics treaty concluded on Friday with an agreement to end plastic pollution, but disagreement over whether goals and efforts should be global and mandatory, or voluntary and state-led.

More than 2,000 delegates from 160 countries, convening in Uruguay for the first of five planned sessions of the Intergovernmental Negotiating Committee (INC), aim to craft the first legally binding agreement on plastic pollution by the end of 2024.

The negotiations took place in the coastal city of Punta del Este pitting a “highly ambitious coalition” of members of the European Union against countries including the United States and Saudi Arabia, which own the world’s largest plastics and petrochemical companies.

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UN Secretary-General Antonio Guterres, who has said plastic is a “fossil fuel in another form,” urged countries to crack down on pollution and production.

“I call on countries to look beyond waste and turn the tap on plastic,” he said on Twitter.

Members of the United Nations agreed in March to create a treaty to deal with the scourge of plastic waste, but they disagree on key issues, including whether to reduce plastic production, phase out types of plastic, and harmonize global rules.

The High Ambition coalition of more than 40 countries, including EU members Switzerland and host Uruguay and Ghana, wants the treaty to be based on mandatory global measures, including production restrictions.

“Without a common international regulatory framework, we will not be able to meet the global and growing challenge of plastic pollution,” Switzerland said in its position statement.

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This approach contrasts with the state-driven pledges advocated by countries such as the United States and Saudi Arabia.

“The United States is committed to working with governments and other stakeholders throughout the INC process to develop an ambitious, innovative, and country-oriented global agreement,” a State Department spokesperson said in a statement.

‘Potential weakening of obligations’

Washington said it wanted the agreement to resemble the structure of the Paris climate agreement, in which countries set their own greenhouse gas reduction targets and action plans.

Saudi Arabia has said it wants a treaty focused on plastic litter built on a “bottom-up approach and based on national circumstances”.

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Critics say such an approach would weaken the global treaty.

“Although there are some staunch opponents of global norms and standards they are in the minority, which could weaken countries’ obligations to take action,” said Eric Lindbergh, WWF’s Global Head of Plastics Policy.

Industry representatives at the talks touted the essential role of plastics in everyday life, and called for the treaty to focus on waste management rather than measures that drain production.

“At the end of the day, we hope the committee will come to the same conclusion we did, which is that increasing recycling offers the best solution to reducing plastic waste,” said Matt Seeholm, President and CEO of the Plastics Industry Association.

Environmental group Greenpeace said that without a strong treaty, plastic production could double within the next 10 to 15 years, and triple by 2050.

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Even as some countries are divided over the approach the treaty should take, some observers said there appears to be growing agreement that plastic pollution isn’t just about waste that ends up in the ocean.

“Plastic is no longer seen as just a marine litter issue. People discuss plastic as a material made of chemicals,” said Vito Ponsanti, policy advisor for the International Pollutant Elimination Network. “There was a shift in the narrative.”

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