MBS Day Ahead: Conspiracy Theory? So What

You'll see more and more of this in the coming days/weeks--the various iterations of "China dumping US Treasuries at an insane pace!"  Oh no! 

Wait... so what?

Here's a more sober assessment from yesterday, but also highlights the problem of pundits getting caught up in stuff that doesn't matter.  Doomsday econo-blog puts out a seemingly important article on some seemingly dire scenario and confused market-watchers (which apparently includes Bill Gross) quickly jump at the chance to justify market movement that they were having a hard time reconciling otherwise. 

Bonds aren't falling as fast as stocks and we don't know why?  Quick!  Someone find an explanation!  And if the explanation is sensational, and especially if the explanation casts China in some position of power over the US in an ominous way, all the better to entice your mouse clicks with!  It's pretty formulaic.  Don't be fooled.  If we're to set about the task of reconciling divergences between stocks and bond yields, we'll have a lot more work to do than merely unearthing one conspiracy theory--no matter how ominous or Chinese it might be.

You know what... It almost looks like those two lines have almost nothing to do with each other on a fairly regular basis!  Sure, maybe China is selling, but guess what!  Far from the madding crowd of the econo-blog-o-sphere, real people who trade real money are well-acquainted with the fact that such selling frequently occurs when other countries' currency loses value. 

Besides, we've seen this rhetoric before when it comes to China, yet they continue to top the list of major foreign holders of US Treasuries, and will continue to top that list even if they've sold a couple hundred billion over the past few months.  This isn't something that keeps bond traders up at night.

Much more likely to interfere with sleep is the ongoing assessment of the big picture.  Are we or are we not on the cusp of major downturn in global growth?  China-related issues are indeed important in that regard, and they'll continue to make well-deserved headlines as a result.  But we don't need to use them as an excuse for underperformance of recent stock market moves.  Even without the stock market comparisons, the simple fact that bonds had rallied for 6 straight weeks means they don't need any excuse to sell-off this week.  We knew a pull-back was coming and that last week's rally was tantamount to bonds being 'dragged lower against their will.'  It will be more alarming if 10's break yesterday's high yields.