Five large purchasers of US Treasuries – China, Russia, Norway, Brazil, and Taiwan – have changed their minds. They’re dumping Treasuries, each for their own reasons that are now coinciding. And at the fastest rate on record.
For the 12-month period ended July, sales of Treasuries by central banks around the world reached a net of $123 billion, “the biggest decline since data started to be collected in 1978,” the Wall Street Journal reported.
China, the largest foreign owner of Treasuries – its hoard peaking at $1.317 trillion in November 2013 – has been unloading with particular passion. By July, the latest data available from the US Treasury Department, China’s pile was down to $1.241 trillion. But in August, the real selling started when the yuan suddenly spiraled down further after its devaluation. Panicked, and fearful of losing control over their currency, officials at the People’s Bank of China sold Treasuries and bought yuan to stabilize the currency.
That month, China’s foreign exchange reserves, which include a variety of currencies, dropped by a record $93.9 billion. And in September, they dropped another $43.3 billion, to $3.51 trillion. It was the fifth month in a row of declines. The Journal:
Internal estimates at the PBOC show that it spent between $120 billion and $130 billion in August alone in bolstering the yuan’s value, according to people close to the central bank.
Russia unloaded $32.8 billion in Treasuries in the 12-month period ended in July; Norway, which like Russia was hit by the oil price rout, sold $18.3 billion, and Taiwan $6.8 billion.
Not all central banks were sellers. India added $36.6 billion to its stash over the 12-month period. And the Fed, which after five years of QE is sitting on more Treasuries than any other central bank, is hanging on to its pile of $2.45 trillion, diligently rolling over any maturing debt.
This is what that staggering reversal of flows looks like; note how foreign central banks started curtailing their purchases already in 2013, when the end of the Fed’s QE moved into sight:
Once the biggest buyer, China starts dumping U.S. government debt http://t.co/kWerWlmBjj pic.twitter.com/exnQljSJ20
— Wall Street Journal (@WSJ) October 7, 2015
But for every sale there must be a buyer. And there were plenty of them, companies, funds, and individuals around the world. And if push comes to shove, and Treasuries begin to spiral out of control under toxic selling pressure, the Fed, which stops before nothing, would jump in and buy whatever China is selling. Or at least, everyone assumes that it would. And so yields have stayed low. In fact, the government was able to auction off thee-month T-bills at a yield of zero for the first time in history, just when central banks are dumping Treasuries, and despite a multi-day rally in stocks. Read… Something’s Up: Panic Buying of Super-Liquid Treasuries
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Back in 2008, when the Chinese started dumping GSEs, the US Treasury changed its GSE guarantees from implicit to explicit, and then the Fed, through QE, started buying them as fast as the Chinese and the big six US banks were selling them. You can bet on it, that when necessary, the Fed will start buying Treasuries again.
Supposedly, the Fed is not permitted to buy new Treasuries directly from the US Treasury. Instead, the Fed buys them from the Primary Dealers (big banks):
(FRBNY) “The Federal Reserve Act specifies that the Federal Reserve may buy and sell Treasury securities only in the “open market.” The Federal Reserve meets this statutory requirement by conducting its purchases and sales of securities chiefly through transactions with a group of major financial firms–so-called primary dealers–that have an established trading relationship with the Federal Reserve Bank of New York (FRBNY). These transactions are commonly referred to as open market operations and are the main tool through which the Federal Reserve adjusts its holdings of securities. Conducting transactions in the open market, rather than directly with the Treasury, supports the independence of the central bank in the conduct of monetary policy. Most of the Treasury securities that the Federal Reserve has purchased have been “old” securities that were issued by the Treasury some time ago. The prices for new Treasury securities are set by private market demand and supply conditions through Treasury auctions.”
“Primary dealers—banks and broker-dealers that trade in U.S. Treasuries with the New York Fed—are the largest group of buyers at auction. These financial institutions are active in buying and selling U.S. government securities. Other auction participants include investment funds, pensions and retirement funds, insurance companies, foreign accounts, non-profit organizations, and others. Only the designated primary dealers are required to bid a specified amount in every Treasury auction. ”
The Fed’s buying of Treasuries from the primary dealers, and not directly from the US Treasury, amounts to little more than a financial circle jerk.
Your conclusion is so true Rich.
Since the Fed has embarked on QE, it has basically printed $4 trillion. Wall Street’s big hitters like JPMorgan Chase, have been given interest free cash to hold on ‘reserve’ to match this money printing by the Fed. With this ‘reserve’ as a backstop, they can do their Bankster Ponzi-schemes, and of course Congress made sure to protect their trillions of dollars of derivatives with the 16 December 2014 Cromnibus Bill.
The unloading of US Treasuries combined with an unserviceable national debt that exceeds GDP is one hell of a recipe for trouble down the road. Right now very short term T Notes are being sold at essentially zero interest. In January 2007, 1 year T Notes carried 5% interest. At some point the Fed will lose the ability to maintain ZIRP, and at that time our economy will be shattered.
makes one wonder what these foreign entities will demand from the US in the future for trade if they don’t want our treasuries anymore— devalued dollars?gold?
GOLD. They are accumulating it.
I respect and admire many of the analyses put forth in the comments on this site. However, I still maintain that the ‘main-event’ event was 2008/09 and everything that follows is a result of the ‘fix’ rupturing and/or disintegrating.
Some of these countries need the money and some want to eliminate the risk of having sanctions imposed on them. Either way it is a reflection of the world in economic and political crisis.
Here are foreign holdings and net purchases of Treasuries taken back to 2000. China held just $60B in US debt back then and peaked at $1.3T in September 2013. Quite the parabolic rise.
https://docs.google.com/spreadsheets/d/1rPN5Wro7Yc-aeott4sE4rsmgDBgA-LDoux8SlQ4eYZo/pubchart?oid=1401954022&format=interactive
The central banks are not dumping USD treasuries but the people and companies in these countries are dumping investments in their currency and transfer them to USD to invest in USD dominated assets. (it can also be foreign people and companies living/staying in these countries. Think for example GM or FORD etc. ) The central banks i.o.w. need to sell their treasuries to get USD which than are sold for local currency. (This is causing QE in reverse) The new owner of the USD invest its money than in USD dominated assets. Since the stock market is very high (s&P etc) it might be that this person/company decides to park his USD in treasuries. This means we have people who sell treasuries (central banks) and we have people who buy treasuries. So it should be treasury neutral. But banks front run what is going on in the market and need to earn something on the transaction so its slightly negative for treasury rates.
“begin to spiral out of control under toxic selling pressure, the Fed, which stops before nothing, would jump in and buy whatever China is selling.”
What many people don’t realize is that the Fed not only buys the Treasuries in open market but also front runs before the auction by artificially bidding them up – it’s all part of CB cabal. AUDIT THE FED!
I don’t get it, are they just ‘selling’ treasuries for dollars? Does that mean they are pushing up the dollar by selling treasuries? Also, which is the safe haven asset? The treasuries or the dollar? If both, then how does exchanging one for the other alter anything from their point of view?
Or are they buying some other asset by the proceeds from treasury selling, which would be obviously riskier? If so, then how does that mean fear and pessimism? To me, that seems precisely the opposite.
They are selling treasuries to get dollars so their economies which financed in cheap dollars don’t implode as they unwind these dollar loans. The dollar is rising in value and now instead of being a great deal to finance in dollars it is a death spiral as the dollar gets stronger and stronger.
There is close to 9 Trillion in such overseas dollar pegged financing and it is all blowing up faster and faster and faster. Most companies that financed will be unable to pay back their dollar loans as the dollar rises in value. Most countries that pegged their currency to the dollar will get screwed in trade as their goods get more and more expensive.
What are you seeing in both treasuries and the dollar are the results of deflation on a scale which we will never see again in our lives and it has only just begun.
Eventually treasuries will yield -10% and that is if we are lucky.
All that excess capacity around the world has to be liquidated and QE and all the other games that were played just allowed the carry trade to continue for so much longer than it should have and now it is blowing up.
If referring to China, they are selling treasuries for dollars. This exchange of dollar-denominated assets does not affect the value of the dollar versus the yen. They then use the dollars to buy yen, which supports the value of the yen versus the dollar. When they hold dollars, it’s not actual cash (at least not most of it). It’s an account value. The account value is just a contract right, so it is exactly as safe as the institution holding it. Treasuries are, in that sense, safer than (electronic) cash, especially when you have billions of dollars,