“Since the year 2000, there has always been a big central bank on the margin buying a lot of Treasuries,” Credit Suisse Group AG’s Zoltan Pozsar said during a recent live episode of Bloomberg’s Odd Lots podcast.
Now “we’re basically expecting the private sector to step in instead of the public sector, in a period where inflation is as uncertain as it has ever been,” Pozsar said. “We’re asking the private sector to take down all these Treasuries that we are going to push back into the system, without a glitch, and without a massive premium.”
Still, if it was just the Fed -- with its long-telegraphed balance-sheet runoff -- reversing course, market angst would be much more limited.
It’s not.
Prohibitively steep hedging costs have essentially frozen Tokyo’s giant pension and life insurance companies out of the Treasury market as well. Yields on US 10-year notes have plunged well into negative territory for Japanese buyers who pay to eliminate currency fluctuations from their returns, even as nominal rates have soared above 4%.
Hedging costs have surged in tandem with the dollar, which has climbed more than 25% this year versus the yen, the most in Bloomberg data going back to 1972.
As the Fed has continued to boost rates to tame inflation in excess of 8%, Japan in September intervened to support its currency for the first time since 1998, raising speculation the country may need to actually start selling its hoard of Treasuries to further prop up the yen.
And it’s not just Japan. Countries around the world have been running down their foreign-exchange reserves to defend their currencies against the surging dollar in recent months.
In fact, emerging-market central banks have trimmed their stockpiles by $300 billion this year, International Monetary Fund data show.
That means limited demand at best from a group of price-insensitive investors that traditionally put about 60% or more of their reserves into US dollar investments.