Return of the Great Bond Conspiracy

The old saying goes that just because you're paranoid doesn't mean everyone else isn't in on it. It's starting to feel that may be true in the bond market.

For years (even decades) there have been theories about collusion between America and Asia in the government bond arena. Through the 1980s and 1990s, Japan supported America by buying Treasuries. And since 2000, China has stepped into that fray. Using its trade-earned dollar holdings to invest heavily in American paper.

The conspiracy camp says Asia has been brow-beaten by America into doing so. There is no sound business case for them to be investing in U.S. bonds.

The anti-conspiracy answer is that Asian nations are acting autonomously, based on their best analysis of the global investment landscape. They're not trying to help America, just to help themselves.

Recent data seems to argue for the former case.

There's been a lot of talk lately about the fate of U.S. government housing agencies like Fannie Mae and Freddie Mac. These agencies are in trouble, on the back of trillions of dollars in bad home loans. Everyone knows it, and lately the American government seems to be putting on a push to find a solution.

And incredibly, one seems to have emerged (at least a temporary one). But not from the U.S. government. From Asia.

Back in February, Japan began buying significant quantities of agency bonds. For the first time in over two years. Data released this week show that since February, Japan has snapped up over $30 billion in agencies.

And just as before, what started in Japan is now spreading to China. In June (as announced this week), the Chinese picked up $5.6 billion in agencies. Bringing the nation's two-month total purchases to over $10 billion. The first significant Chinese agencies purchases since mid-2008.

Buoyed by Asia, the overall foreign market for agencies is showing its first signs of life in a long while.

Here's another interesting thing. It appears that foreign buyers have made a calculated decision to move out of Treasury bonds at the same time they move into agencies. In May and June, foreign net purchases of Treasuries came in at just $48 billion. One of the weakest showings in the last year.

Maybe U.S. agencies are looking like a good deal. Maybe Asia is a lot more savvy in the bond market than I am. But it sure looks like a coordinated bailout.

Here's to keeping an open, suspicious mind.

By. Dave Forest of Notela Resources