Treasury Auction Tea Leaves

Is China quietly dumping Treasuries? What bond yields, USD moves, and Treasury auctions might be telling us.

KEY TAKEAWAYS

• The administration’s softer tone suggests a possible shift toward resolving tariff tensions.
• Equities responded positively, but bond markets are behaving erratically.
• Treasury yields have spiked while the Dollar has dropped—an unusual divergence.
• Some suggest China may be selling Treasuries, but no clear proof exists.
• Today’s 5-year Treasury auction may hint at changing foreign demand.

MY HOT TAKES

• Markets are pricing in a diplomatic pivot—but the bond market isn't buying it.
• The yield-Dollar divergence could be our first real sign of foreign pushback.
• Even without a smoking gun, auction data can give us valuable insights.
• China selling Treasuries isn’t just financial—it could be a geopolitical strategy.
• You can quote me: “Treasury yields have been all over the place and, in fact, they seem to be in the hands of traders who have an ‘abnormal’ agenda.”

Can I tempt you? Though it is simply talk at this point, the administration has certainly softened its tone on its US vs. The World tariff assault. Of course, the tone can and most likely will change many more times before a deal is actually struck. However, the important signal here is that, indeed, the Administration is seeking a deal, which is a good thing; just a few weeks back it seemed that the President was unconcerned with the very real financial and economic implications of exacting high taxes on US companies. Focus on a resolution is positive, and equities have certainly expressed their approval. But what about bonds?

Well, bonds are a bit trickier. Sure, there are bond traders out there who buy and sell based on their expectations of inflation, economic strength, and currency fluctuations. That trading sends clear messages through the yield curve, and normally, understanding what those bond traders are thinking, is relatively straight forward. But, in case you missed something in these past 96 days, we are not in a “normally” kind of situation these days.

Treasury yields have been all over the place and, in fact, they seem to be in the hands of traders who have an abnormal agenda. Wow, that was a 👈statement jam packed with info, wasn’t it. Now, to be clear, some of the moves make sense, but the recent spike in yields, it has been suggested by some, is the result of China dumping Treasuries in retaliation for the recent trade tiff with the US. 

What makes the recent increase in yields noteworthy is the simultaneous decline in the US Dollar. You see, currencies typically strengthen when sovereign debt yields rise as foreign investors move funds into Dollars to buy higher yielding Treasuries. But in this case treasury yields spiked and the Dollar declined. This implied that someone sold bonds causing yields to gain and then repatriated the proceeds by selling Dollars. To illustrate this point, check out the following chart and keep reading.

This chart shows 10-year Treasury Note yields (blue line) and the US Dollar Index (red line). Notably, their movements are correlated at a high level, for the aforementioned reasons. However, this correlation completely inverts in the beginning of the month with a notable divergence. This leaves us with a big question: Is China actually selling Treasuries to put some pain on the US? Well, higher yields are certainly not positive for economic growth, borrowers, and even stocks to some extent. Oh, and higher yields are certainly not positive for the Treasury, whose debt service costs are on the rise.

Let’s take a step back. China is the second largest holder of Treasuries behind Japan, so naturally, it is feasible to believe that China may have sold out some positions causing a rupture in the long-standing relationship between yields and currency. But is it a smoking gun? Not likely.

You see, China holds lots of US debt, and indeed, one of the reasons is that the US debt affords safety, but another reason is more practical. That HUGE trade deficit we run with China means that Chinese companies are being paid in US Dollars, so rather than repatriating they simply buy Treasuries… safe treasuries. Once again, it is still difficult to really see if China or Chinese companies are selling the Treasuries causing yields to climb.

Is it? Well, maybe we should look at it from a different angle. Foreign governments buy lots of US Treasuries at auction. In those auctions, we can observe the total amount of bonds tendered by Indirect Bidders, which are mostly foreign buyers. Roughly half of indirect bids come from the foreign governments and the rest for private foreign investors.

Today, the US Treasury will auction $70 Billion 5-year Notes, a maturity favored by foreign investors. After the auction is complete, the Treasury will publish the breakdown of tendered (submitted) bids. If we notice a marked decline in the % of total indirectly tendered bids, we can deduce that foreign demand is diminishing. While a drop off will be noteworthy, it will still not point to Chinese selling or even decrease in demand, as all foreign governments fall in the “indirect” bidder category.

So, to sum up, we still have no smoking gun for China selling Treasuries and repatriating out of dollars. But, we can see if foreign government demand for Treasuries is ebbing by observing the auction results. The following screenshot shows the results of the last 5-year auction, and we can simply compare today’s results to past results. Still no smoking gun for China, but possibly some side effects of a looming trade war with the world. The auction takes place at 1:00 PM Wall Street Time.

YESTERDAY’S MARKETS

Stocks ran up gains yesterday as administration soundbites sparked hopes that this trade debacle may ease up a bit.  Messaging around Chinese tariffs and negotiations have eased up significantly and markets are reluctantly buying in. Treasury yields were flat on the day and the Dollar's decline streak was snapped–hope lives. Tesla kicked off Mag-7 Earnings last night and missed by a mile causing the stock to GAIN in after-hours trade, cementing its status as a meme stock for adults.

NEXT UP

• S&P Global US Flash Manufacturing PMI (April) is expected to come in at 49.0 after printing 50.2 last month. While a print below 50 is considered contraction territory and negative for the economy, the headline number only tells a small part of the story. Look for hiring plans and capital expenditure expectations to determine business confidence… and ultimately, economic health.
• S&P Global US Flash Services PMI (April) may have slipped to 52.6 from 54.4.
• New Home Sales (March) probably gained 1.3% after climbing by 1.8% in February.
• Fed Beige Book will be released at 2:00 PM Wall Street Time. This release typically without hype, but more recently, Fed Governors have been quoting these anecdotal signals from across the Fed’s network. These may be soft indicators, but they are indicators, and they should not be waved off.
• Important earnings today: Vertiv, Thermo Fisher, Xerox, Amphenol, AT&T, Boeing, General Dynamics, Virtu, WABCO, Norfolk Southern, Old Dominion Freight, Lenno International, GE Veranova, Boston Scientific, NextEra Energy, Watsco, Philip Morris, Otis Worldwide, Whirlpool, Chipotle, O’Reilly Automotive, Molina Healthcare, Texas Instruments, SeviceNow, Lam Research, ResMed, IBM, Knight-Swift, Newmont Corp, United Rentals, Edwards Lifesciences, and Viking Therapeutics.

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