Ride The White Horse
Following up on Mr. Big's Plan and The Bond Junkies
BM,
"China may have to take further drastic measures to support its economy in comparison to the US and EU markets. This, alone, could drive a flight to quality that continues this imbalance for many months/years."
Yes, riding the white "horse"...
In most all scenarios, longer duration UST's and German bunds should get the bid. Potentially extending and exacerbating our current malaise by inverting the yield curve. TBD. However, in order to defend their markets and currencies, China and EM's have begun and could continue to liquidate a portion of their FX reserves. These portions include mostly long dated UST's. This additional market supply, may push prices down and yields up, counterbalancing any other "flight to quality". IMHO, the additional market supply will get soaked up by no lack of demand in the secondary market. TBD.
A massive flight from the dollar would cause global economic chaos of biblical epic proportion. On the other hand, if the trade weighted dollar breaks 150 or the DXY breaks 105-110; the magnitude of resulting economic chaos due to carry unwinds and debt defaults via ED eurodollar squeeze could be just as epic.
Given the choice of dammed if you do, dammed if you don't, many CB's may slowly take the opportunity to wean their dollar habit to 25-30%. Then we would have to begin to deal with the consequences of having three elephants parked in our front room, budget deficit, trade deficit and national debt. All due to monetary policy, corporate policy and government fiscal policy. TBD.
The ubiquitous "they" somehow need to manage to keep the ROW's on that "horse", as in mainlining on dollars.
BM,
"China may have to take further drastic measures to support its economy in comparison to the US and EU markets. This, alone, could drive a flight to quality that continues this imbalance for many months/years."
Yes, riding the white "horse"...
In most all scenarios, longer duration UST's and German bunds should get the bid. Potentially extending and exacerbating our current malaise by inverting the yield curve. TBD. However, in order to defend their markets and currencies, China and EM's have begun and could continue to liquidate a portion of their FX reserves. These portions include mostly long dated UST's. This additional market supply, may push prices down and yields up, counterbalancing any other "flight to quality". IMHO, the additional market supply will get soaked up by no lack of demand in the secondary market. TBD.
A massive flight from the dollar would cause global economic chaos of biblical epic proportion. On the other hand, if the trade weighted dollar breaks 150 or the DXY breaks 105-110; the magnitude of resulting economic chaos due to carry unwinds and debt defaults via ED eurodollar squeeze could be just as epic.
Given the choice of dammed if you do, dammed if you don't, many CB's may slowly take the opportunity to wean their dollar habit to 25-30%. Then we would have to begin to deal with the consequences of having three elephants parked in our front room, budget deficit, trade deficit and national debt. All due to monetary policy, corporate policy and government fiscal policy. TBD.
The ubiquitous "they" somehow need to manage to keep the ROW's on that "horse", as in mainlining on dollars.
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