What’s going on in the bond market?
According to the Federal Reserve’s own data, foreign entities sold $1 trillion in US securities (bonds and notes) over the past 6 months, but the rate on the 10-year bond. for instance. moved from a 2.3% yield to 1.8% yield. That move goes against what should happen in a sellers markets. As the bonds are sold the yield should rise to entice buyers.
So the simple question is who is buying well over $1 trillion in bonds to keep the yield low?
The December rate rise was not a nod to a recovering economy, but was a backdoor operation to fund Treasury’s secretive Exchange Stabilization Fund, which with off-balance sheet funds is the big buyer of Treasury securities and interest rate swaps, according to some bond market watchers.
Through these secretive operations the Obama administration can keep a cap on the yields and prop up the dollar without showing the world that it is intervening in a huge way in the market.
So if this operation is going on the large Wall Street institutions must be facilitating it through their bond desks, which means they are profiting from the operation.
As the banks report their first quarter results in April it will be interesting to see their bond exposures and profits. Provided they report the activity accurately.