Posted | by David Moenning |

After moving to within a whisker of the 2.6% level (2.595% to be exact) yesterday, the yield on the U.S. Government's 10-Year Treasury pulled back in the afternoon and closed at 2.55%. The key is the closing level was only a smidge higher (.004%) from Tuesday's fix. So, since the bond bears failed to create a second consecutive day of panic, should we conclude that the worry about the bond market is over?

Lest we forget, the driver - at least in the very short-term - to the recent spike in yields had been a Bloomberg report that the Chinese were going to either reduce or halt their buying of U.S. Treasury securities. And with a large amount of supply slated to hit the market in the coming months (the new tax bill will cause even more bonds to be issued this year), traders naturally panicked.

However, anyone who knows anything about China's currency flows is aware of the fact that the world's second largest economy generates a massive amount of U.S. dollars due to its trade with the United States. The problem for China is, what to do with all of those greenbacks. And this is the reason that China is the largest foreign holder of U.S. bonds on the planet.

Yesterday's report, which cited officials close to the matter, suggested that China would begin to diversify its holdings away from the U.S. bond market. And while this sounds all well and good, my understanding is that there just isn't anywhere else in the world to put the sheer volume of dollars that China takes in. So, the idea of China simply halting the purchase of U.S. bonds is humorous. Oh, and if memory serves, China has been talking about this type of diversification for as long as I can remember.

Then this morning, we get word that yesterday's report - the report that caused all the hand wringing - was labeled "fake news" by the Chinese.

Yep, that's right; China's foreign exchange regulator said Thursday that the report in question may not be accurate. The following statement was published on the State Administration of Foreign Exchange (the country's foreign exchange regulator) website:

"We learned the news through some media reports. In our opinion, the news may quote the wrong source of information, or it may be fake news."

The statement went on to say that China's currency reserves have always been managed in a diversified manner in order ensure "the overall safety of foreign exchange assets and maintain and increase their value."

So, there you have it; at least one reason to panic about the bond market, and, in turn, the stock market, seems to have been laid to rest. Well, for now at least.

However, I, for one, am going to continue to watch bond yields very closely here.

Thought For The Day:

A safe investment is an investment whose dangers are not at that moment apparent. -Lord Bauer

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the Economy
      2. The State of Interest Rates
      3. The State of Earnings Growth
      4. The State of Fed Policy


Wishing you green screens and all the best for a great day,

David D. Moenning

Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none.

Note that positions may change at any time.


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