I read a news article today sparked by comments from a Deutsche Bank forex expert that some smaller European institutional clients are beginning to sell their US Treasury holdings. The supposed reason? …shock at Washington demanding to annex Greenland. Treasury Secretary Bessent reports receiving a phone call from the head of DB saying this was a stray comment by some random forex guy and not the bank’s official position.
My thoughts:
–first, a caveat. I’m not an expert on bonds. I’m a stock guy.
Having said that…
–I think domestic ICE operations resonate at least as deeply negatively in Europe as in the US. Europe is where National Socialism arose and where much of WWII was fought. So I think there’s a visceral aversion by individuals and institutions to providing a lower cost of capital to an administration acting this way
–on a more nuts-and-bolts level, the lynchpin of Trump’s bond strategy is being read (accurately, I think) as a return to the policy of the 1970s, when there was no independent Federal Reserve and the White House effectively set rates. For a while back then, at least, lower rates meant lower debt servicing costs. However, the low rates triggered runaway inflation. Under the Paul Volcker Fed, interest rates more than tripled before inflation got back under control. This big rise in rates meant the price of already-issued bonds got crushed.
Every professional bond investor knows about this development and fears a recurrence. Its very easy to see wanting to take money off the table in advance of another catastrophe. And there’s virtually no reason for a big bond holder to want to increase exposure now.
–if this is correct, the big issue is not whether to sell. It’s how to sell without moving the price too much. We can already see what big foreign holders (think: foreign treasuries and international banks) have been doing since the inauguration:
- selling the dollar component of their exposure through the currency contracts,
2. shortening the duration (basically, time to maturity) of their holdings by swapping longer-dated bonds for less volatile shorter-dated ones, and
3. they’ve been doing some net bond selling.
In the case of 2), they’re not changing the fact of the risk of loss due to US rates rising, but they are shrinking the time and degree to which they’ll be exposed.
If there’s anything new in the DB comments, it’s that smaller EU banks are accelerating their exit from the dollar. Maybe their level of worry has increased recently, or maybe they’re close enough to the end of their selling plan that they’re pushing out the last bits relatively quickly, in a less price-sensitive way. If I had to guess, I’d say the latter is the case.