More Support for my “Hunch”

Mid-October, I had some random thoughts on the market.  You can find them here.  Near the end, I hypothesized the implications of a possible liquidation of Treasury holdings in China’s forex reserves in case they had to bailout their financial sector.  

Today I ran into this article in ZeroHedge, which had this and I quote:

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“A crucial constraint is China’s existing holdings of U.S. Treasury securities. Beijing is by far the biggest foreign owner, with an estimated 70 percent of the nation’s reserves held in U.S. government bills, bonds and other dollar assets.

Turn outright seller and the market value of the remaining holdings is likely to plunge.

That’s not a great investment strategy given the Chinese public’s unhappiness about the roughly 38 percent decline in the nominal value of the dollar in the last 10 years.”

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To me this confirms that should China need funds to bailout their banking sector, they would likely resort to selling Treasuries.  

The dynamics of continued QE along with a potential seller as big as China is leading me to seriously consider the prospects of Treasuries over the long-term.  While I believe the short- and medium-term prospects are still supportive of higher Treasury prices, as the probability of a Europe blow up rises, longer-term factors are beginning to build for a possible top in the Treasury markets.  

I’ll begin looking at the 30-yr yield for clues as to whether this developing thesis is potentially true or full of hot air.