Around 2004 when Fed started to hike interest rate with Greenspan as the president of Fed, long-end tenor yields, such as 10 year and 30 year, did not increase, contrary to short-end or mid tenor yields which were affected by funds rate mainly. From this, many economists studied about that case including Ben Bernanke. Main rationale of this so-called Greenspan's conundrum acceptable broadly was that money power from Chinese fast growing FX reserves was buying US treasuries especially in long-end tenor and this limited upward pressure of long-end yields.
According to market, by SocGen's math, China sold their US treasury position by more than worth of 100 billion dollar during last 2 weeks as FX regime in China changed. And we are maybe ahead of Fed fund rate hike by the end of this year with decreasing EM countries' FX reserves recently. It seems contrary environment to mid 2000s, Greenspan's conundrum.
According to Citi or Zero Hedge, EM countries have about 5,500 billion dollar of UST as a position of foreign reserves. And if suppose they decrease their reserves by 10%, the long-end yield could rise more than 100bps. This is one of rationales that Fed should conduct 4th QE rather than monetary tightening...
That said, unless there is another asset purchase by Fed, starting raising Fed funds rate, the long-end yields could be pushed higher either, contrary to mid 2000s...
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| Size of left hand side is Trillion USD, Not Million |
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