The Chinese-Hedging-Gone-Awry Theory of Treasuries

Today must be a risk-on day, my entire screen isn’t crimson all at once and the bonds are taking a breather.

I got a bunch of feedback from my recent post on the bull market in bonds the other day, and much of it was of the disbelief variety.  Anyway, from regular Peter F in NYC comes this interesting bit of speculation on what some in the The Business think may have actually gone on over the last month to propel government paper to its recent peak:

Just putting it out there, responses encouraged:

“Hi, I was sitting out here in the hamptons thinking about the long bond and this nasty rumor about china taking a $430BB loss.  At first I dismissed it, but then I actually starting using my rose’ soaked brain for the first time since August began.  Here is my thinking.  Everyone is assuming China lost money investing in Treasuries, but how can that be with the treasury market crashing to all time low yields, makes no sense, right?

Here is my take.

Beginning this year there was serious money being made(by me and others) shorting the bonds.  Then it stopped and now we have the mass parabolic bond spike we are seeing.  It looks to me like this guy in China, thinking how smart it would be to hedge his position, might have, using derivitives and futures, shorted the hell out of the US Bonds near the end of last year into this year.  Now a $430BB loss seems like a lot, but what happens if you have 2.5 TT in bonds to hedge.  Well a 17% loss would not be out of the question, especially as you tried to cover causing a massive spike in the bonds you were short.

I wanted to run this by you, as the market, which went from really well supplied earlier in the year, to a massive spike higher, seems to be telling a story of someone in trouble and caught the wrong way.  Who can be that big……”

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