Read MoreChinese pouring money into real estate globally
A national liquidity squeeze has pushed China into buying Treasurys at a time when most other investors are selling U.S. government debt, particularly of the longer duration, he said. Investors fear that once the Fed steps out of the game—it already has reduced its monthly purchases by $30 billion and likely will slash another $10 billion from that total this week—yields will have nowhere to go but up as prices fall.
China, though, finds itself in a liquidity squeeze as it seeks to slow down the flow of capital and stave off a feared credit bubble. As a result, Yoo said, it is parking money in bonds and keeping U.S. yields now.
In a note to clients, Yoo explained the dynamic:
We believe that US Treasury yields and the (U.S. dollar) have been depressed by two factors.
—The market is not pricing in sufficient weather payback after an extremely severe winter. With the consensus forecast for Q2 US GDP growth at just 3 percent, Wall Street is expecting the weakest bounce back after a severe winter in 50 years.
—Liquidity squeeze as the result of China's decision to rein in unsustainable credit growth has attracted increased capital inflows into China. This in turn had led to an acceleration in the pace of reserve accumulation. In our view, the recycling of these reserves into Treasuries might be reducing the sensitivity of US rates/(the U.S. dollar) to better US news lately.
For the moment, Yoo thinks it's a temporary phenomenon. After all, the market conditions are all in place for a turn in yields, even though expectations have proven wrong:
The unhappy reality for Treasury bears/(dollar) bulls (including us) this year is that if they were correct about the conditions for higher rates/higher (dollar) soon falling in place, they could not have been more wrong about the market outcome.
To be sure, China, the world's leading foreign holder of U.S. debt at $1.27 trillion, might not be the only explanation.