div align=”left”In a week which has seen those long quiescent bond vigilantes wielding their cudgel in the US bond market, it is notable that there has been a distinct change in official Chinese foreign exchange investment policy since last Summer, with a emstrongshift out of US agency debt and long dated bonds to short duration Treasuries and commodities such as copper/strong/em. Additionally, there has been an acceleration of bilateral trade deals with countries like Brazil and Argentina that bypass the dollar. /divdiv align=”left”While strategy remains opaque,emstrong it seems reasonable to infer that the country is now scrambling to reduce its huge exposure to dollar assets/strong/em as the implicit policy over the last 20 years of subsidizing exports to US consumers and recycling the resultant trade surplus back into US financial assets has run out of road. Moreover, as I have been warning repeatedly in relation to the downside risks on …

div align=”justify”I wrote back on 18span class=”blsp-spelling-error” id=”SPELLING_ERROR_0″th/span December in a href=”http://deadcatsbouncing.blogspot.com/2008/12/corporate-bonds-discounting-depression.html”span style=”color:#cc0000;”Corporate Bonds: Discounting Depression/span/a that investment grade corporate bonds were a cheaper and lower risk play than equities on eventual economic recovery and as a natural home for investors seeking yield in a span class=”blsp-spelling-error” id=”SPELLING_ERROR_1″ZIRP/span world. On that very day AAA spreads peaked at over 3.5%, and have since fallen sharply to 2.88%. /divdiv align=”justify”emstrongThe chart below indicates just how historically extreme the risk premium on AAA rated bonds over 30 year Treasuries has become/strong/em. I would expect spreads to tighten further to no more than 200span class=”blsp-spelling-error” id=”SPELLING_ERROR_2″bp/span over the year. Of course, that spread span class=”blsp-spelling-error” id=”SPELLING_ERROR_3″retracement/span is of little comfort if the Treasury market itself implodes, and bubble talk is now commonplace, but near-term probably misplaced. Risk aversion will remain elevated this year, and emstrongTreasuries are not a bubble in the sense of span …