To put the relative size of China's 7 to 10 year holdings in perspective to the Fed's like holdings, the chart above estimates that a third of Chinese Treasury holdings (likely an overestimation) were of the 7 to 10 year variety (gold line).  The Fed has already rolled off / sold off 1.5x's more 7 to 10 year debt than the Chinese even have.  The impact on the 10 year Treasury yield while the Fed plus China sold off / rolled off a combined $650 billion of 7 to 10 year debt…essentially zero.

But to explain why the yields did not react (and likely never will), I have to take a step back and highlight the changing underlying population and demographics that are driving this.

To broaden the view, check the 15 to 64 year old US total population (red line, chart below) versus year over year changes in that population (blue columns).  Obviously, the peak year over year population growth took place in 1998 (adding 2.7 million persons in that year alone) but growth has decelerated over 80% since that peak growth.  The heyday of fast growing populations (at least, those under 65) and increasing quantities of employees, tax payers, and/or consumers has run its course…yet politicians and the Fed still target and tout economic growth, as if nothing had changed.  However, the continued growth in US employment (and consumption) is simply mathematically running out of able bodies (Detailed HERE).  Plus, the population growth estimates through 2030 shown below are premised on continuing significant rates of immigration.  Absent a significant net inflow of immigrants, the under 65 year old population will be in outright decline.  Of course, the changing population growth and demographics (particularly among the populations that do the vast majority of consuming) is a global issue (Detailed HERE).

Which is to say, the remaining three sources of buying will have to really step up their appetite for US debt.  But foreigners and the Federal Reserve have already ceased buying (net), and the sole buyer remaining is the domestic public (domestic insurers, banks, mutual funds, pensions, etc.).

The Fed (and foreigners) ceased buying and turned to net sellers by 2015 as the IG trust fund buying continued decelerating against ramping Treasury issuance.  This meant there was only one buyer left, the domestic public.  But for domestic buyers, the spread between short term borrowing and long-term yields was falling from over 250 basis points in early 2014 to the current 26 basis points (grey shaded area in the chart below versus Fed's shifting holdings).

Categories: ZH