Bond Stats Suggest US Economic Improvement

Ward McCarthy's Fixed Income Group at Jeffries (JEF) issued their bond market update last week.  To follow up our previous post on China's ability to forestall a hard landing, JEF had some good statistics from the U.S. Treasury on foreign holdings of Treasury securities.  As of the October 2011 reporting period, China's holdings of U.S. Treasury securities were $1.134 trillion.  The next biggest foreign holders were Japan at $979 billion and the U.K. at $408 billion.  Chinese holdings represented 24% of total foreign holdings, which might actually be an underestimate of their holdings because of the consistent upward revisions to Chinese holdings in the past. 

Total Chinese holdings of foreign assets may be in excess of $2.5 trillion, although this estimate is not  for the same period from the U.S. Treasury.  The point is the same made in the previous post: there is a lot of high powered money to be put in service should the Chinese economy be subject to severe economic stresses from a collapse of its export markets in Europe and the U.S. 

McCarthy's group was fairly pessimistic about the U.S. recovery back in August, but they note that some bond market technicals suggest that bonds are discounting modest improvement in the U.S. economy from here.  They note, for example, JP Morgan's issue of a 30 year bond with the lowest coupon of any high quality, financial issuer since 2005.  JPM's coupon of 5.40% was 250 bp above the 30 year T bond. The group also suggests that investor appetite remains strong for high quality corporate paper in the primary market, particularly from financial issuers.  Go figure, but it's interesting data as the high quality corporate market winds down until Q1 2012.