Treasury

Chinese Selling off U.S. Treasuries: Maybe You Should Worry, Maybe Not

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With the Dow Jones down around 10 percent in the past three months and China's stock market going through a big and inevitable correction, more news of ill portent for the U.S. dollar and economy this week, from Bloomberg:

China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter…

Two-year Treasuries erased an earlier advance, with their yield little changed at 0.67 percent as of 11 a.m. in London. It fell as much as two basis points. The 10-year yield declined three basis points to 2.15 percent, near to its average for the past month.

Chinese sales of U.S. government debt may have kept yields from falling this month as a selloff in global stocks prompted investors to favor the safest assets…

The latest available Treasury data and estimates by strategists suggest that China controls $1.48 trillion of U.S. government debt, according to data compiled by Bloomberg. That includes about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts.

The PBOC has sold at least $106 billion of reserve assets in the last two weeks, including Treasuries, according to an estimate from Societe Generale SA…

"Strategically, it probably has been China's intention to find the right time to lighten up its excessive accumulation of U.S. Treasuries," he said.

Lisa Abromowitz on how those Chinese actions affect some standard "other things equal" market logic that should have made treasuries a safe haven right now:

Treasuries, often a haven for investors fleeing riskier assets, actually lost value after China rocked markets by devaluing its currency to stimulate growth. Longer-term U.S. government Treasuries have declined 2.3 percent since Aug. 17, according to Bank of America Merrill Lynch index data.

This doesn't make sense from a purely economic standpoint, since the prospect of slower growth should make these securities more attractive, not less. But there's another force at play. China, the world's second-biggest economy that's accumulated trillions of dollars of foreign assets since 2003, is now selling some of those securities, including Treasuries…

Joe Weisenthal says this week's event shows that apocalyptic fears about how the Chinese could use their vast Treasury holdings to harm us are bunk:

China hasn't been adding to its U.S. Treasury holdings for a long time….

The bottom line is that we haven't seen upward pressure on U.S. rates (at all) during this selling. If anything, U.S. borrowing costs continue to confound economists, who always think higher rates are right around the corner. ….

There's just zero evidence that China reducing its holdings of U.S. debt is creating any real pressure on anything. In fact, even if China really wanted to dump U.S. debt for the sole purpose of causing economic harm, there just aren't any alternative assets that are as deep or as liquid.

The folks at Zerohedge, the most entertaining and spine-chilling source of regular "the whole international fiat currency house of cards is collapsing" news and commentary (who, yes, see destruction in nearly all portents) were ahead of the curve in warning about the Chinese T-dump and see QE4's inevitability:

now that China's UST liquidation frenzy has reached a pace where it could no longer be swept under the rug and/or played down as inconsequential, and now that Bill Dudley has officially opened the door for "additional quantitative easing", it would appear that the only way to prevent China and EM UST liquidation from, as Citi puts it, "choking off the US housing market," and exerting a kind of forced tightening via the UST transmission channel, will be for the FOMC to usher in QE4.

My advice remains the same: buy low, sell high, whatever, just so long as you're happy. (Required legal fine print: past guarantees are no future of return performance. Not a licensed financial adviser.)

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  1. During the big finacniapocolypse in 2008, T-Bills were actually yielding negative for a time. That is, major institutions were actually willing to put 1 dollar in treasuries with the guarantee that it would pay back $.97. That’s how the major institutions viewed risk. The risk of the market was worse than the risk of an ailing, over-extended United States.

    This leads me to believe that the end of US borrowing will come during a relatively good stock market, rather than a bad one. It is only when stocks and other private instruments are a better risk than the treasuries that major institutions will finally give uncle fed the finger.

    1. That is, major institutions were actually willing to put 1 dollar in treasuries with the guarantee that it would pay back $.97. That’s how the major institutions viewed risk. The risk of the market was worse than the risk of an ailing, over-extended United States.

      There has got to be some other factor at play if that is the case. Putting $1 in my mattress guarantees that it pays back $1. Why would I settle for losing 3 cents?

      1. If you put $50,000,000 in your mattress, it guarantees someone will steal way more than 3% of it.

        1. So that’s why Krugman wanted to mint that $1 Trillion dollar coin ?

        2. Confuseus say: History shows that those who place their faith in dollars get big backdoor ream-out.

      2. There has got to be some other factor at play if that is the case. Putting $1 in my mattress guarantees that it pays back $1. Why would I settle for losing 3 cents?

        There is no way to get billions or trillions of dollars in cash. They have to put it somewhere, and if you remember, even Money Market funds were in danger. The markets were collapsing over a few days, so they couldn’t just broker 2 trillion in gold purchases.

        1. Even if it was possible to get your hands on large amounts of cash, simply possessing $10,000 or more will result in automatic theft of the entire stack by the feds. If you can “prove” in was legitimately gained, you may get it back. Not likely, though.

    2. Or enough non-American assets become much better investments than American ones.

      1. There’s some truth to that. But, it would have to happen first. America’s debt situation sucks. But it sucks less than Europe’s or Japans. Furthermore, investors are betting with their money that America has better growth prospects.

        1. I think soon we will be in a world where there are way more good assets, especially in Latin America, than we have now. And better currencies. Investors are just going to sort of snap out of it en masse.

      2. Maple orchard derivatives and baby harp seal pelt futures.

        1. Damn right!

          In all seriousness, Canada’s entitlements are much stingier than America’s. Our federal debt situation is okay. Some of the provinces are self-fucked.

          1. Their entitlements are stingier, and their balance of nature and people is far more sane. All the wealth producing things we’ve banned here in the USA are perfectly acceptable in Canada. Here we have the minority nature worship coalition throwing us in chains.

            Economically, Canada will outlast the USA.

        2. And that’s why I’ve situated myself so close to the US/Canada border that I practically live on it.

  2. since the prospect of slower growth should make these securities more attractive, not less.

    WTF?

    Slower growth means decreased revenue. For both the private sector AND the government sector. So the government will have to issue even more Treasuries because it will never cut spending and will likely increase it as “stimulus”.

    Of course, if there was real growth instead of just nominal growth, there theoretically should be no reason for Treasuries to even be issued since government revenue would likely increase and therefore eliminate the need for government to borrow.

    In any event the author ignores supply and demand. Someone demands payment now, and you have assets to sell. Might as well sell Treasuries and take the profits to make your payments. Of course, there really isn’t the demand for Treasuries everyone think there is, China just bought all the excess because they had to park their dollars into something relatively liquid – there’s only so many empty malls one can build.

    The author probably thinks the banks suddenly became prudent lenders when the Fed bought all the junk securities at par, the banks would never lend money for houses and cars to shitty borrowers ever again. No sireee.

    1. “since the prospect of slower growth should make these securities more attractive, not less.

      WTF?

      Slower growth means decreased revenue. For both the private sector AND the government sector. So the government will have to issue even more Treasuries because it will never cut spending and will likely increase it as “stimulus”.”

      No, you are ignoring the time scale. Stocks react much quicker than bonds and tend to drop further. Thus if you expect a downturn you move your money into bonds. Then when the market recovers you move your money out of bonds back into stocks.

      Treasuries are riskiest at the start of a recovery, not at the start of a recession.

      1. Right, put another way, the risk in Treasuries and Bonds is a sliding scale of possible default. The company or government will be unable to pay your interest, or even worse, be able to pay you back the bond issue price. In general, bond owners are far ahead of the line (US Autoworker Unions notwithstanding) and will at least receive some amount of their money back. But absent a company/country going completely tits up, the risk is that they will miss some payments or restructure for less money.

        The risk of stocks is worse- you are last in line for repayment if the issuing company goes bankrupt. And of course, you aren’t receiving payments but hoping you can sell the stock to someone else. In a downturn, you have the same risks of Bonds (that the issuer will be unable to make payments) in addition to the risk that you will not find anyone else to take that stock off your hands. In a market where companies have reduced revenues, having bonds is less risky than having stock in the same company.

        1. Cleanest dirty shirt. You’re losing at a slower rate is all.

          Not saying bonds can’t increase from here, they sure can. But if buyers are raising prices, the Chinese would be stupid not to sell if they need liquidity.

          Switzerland dropped their Euro peg, eventually China will drop their dollar peg. Will they hold onto all their Treasuries before dropping the peg or will they sell some first?

  3. So, China not super-interested in our debt anymore?

    1. China doesn’t give a shit about our “debt”. China doesn’t want a free floating currency. It purchases dollars to keep the yuan pegged. It must do something with those dollars, therefore it purchases Treasurys. If it were to release those dollars (change them into yuan) it would create massive inflation in China. So, they sit on the PBOC balance sheet as an asset.

      1. Uh no. Releasing massive amounts of dollars would take Yen out of the Chinese economy, leading to the opposite of inflation in China. America OTOH…

        1. The Chinese currency is ‘yuan’ or renminbi if you prefer. The yen is the Japanese currency.

        2. The first part of MLS’s statement is correct, but you are right that it wouldn’t cause inflation in China. Instead, the rising value of the Yen would start making their exports more expensive, and the dropping value of the US dollar would make America’s exports cheaper.

          1. Yep, you’re right about the Renminbi.

      2. China is also not as interested in using its currency as a cudgel to be more ‘competitive’ in manufacturing as much as they are interested in reserve status.

  4. I also don’t see see why people would blame China for “selling high” on Treasuries. The only news here is that government normally buys high and sells low.

  5. China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter…

    But why?

    Previously, China purchased dollars from sellers (international banks) daily. Those purchases were used to support the yuan within it’s pre-set trading band. There was no need to sell Treasurys because enough dollars were available from sellers. Now, the PBOC needs to sell those Treasurys because there aren’t enough dollars available in the market to maintain the peg within the band. My guess: We’ve got an offshore bank balance sheet contraction (coming from Euroland). Making it difficult to purchase dollars. This happened previously – in 2007 and 2008.

    Good luck, bitches.

    1. Maybe they are just tired of holding so many treasuries and want to sell high?

      1. What made them “tired”?

        1. Animal Spirits. It’s always those damn animal spirits.

          /Ghost of Keynes.

          1. Maybe we could spent some tax dollars to appease the animal spirits and grant us prosperity through the Holy Multiplier.

        2. The unease at the rate that America is racking them up and the rate it central bank buys them.

    2. Oh, and this is why the FED cannot raise rates. Increasing the cost of dollars will create an international liquidity squeeze. That’s why the IMF, Larry Summers, and the PBOC have all urged the FED to delay tightening – they believe it will create a “dollar” shortage freezing markets like in 2007.

      1. The fed absolutely can raise rates. There is nothing wrong with having another recession. We needed it in 2007 we need it now.

  6. The bottom line is that we haven’t seen upward pressure on U.S. rates (at all) during this selling.

    Yeah, for exactly the same reason that there wasn’t any “upward pressure” on US rates over the last 6 years when it was the Treasury selling vast amounts of debt into the bond market.

    Because the Fed is clearing the auctions, either directly or through proxies.

    Fortunately for us, monetizing debt like this never turns out badly, so we’re all good.

    1. Right on, RC. Japan is still there, no depression of any kind, just a mild 20-year recession. They’re so used to recession by now nobody even notices it anymore. Even your average Japanese citizen only cares about macroeconomics, the average Japanese cares so little about microeconomics they won’t even go borrow money to buy a car.

      1. The difference is that Japan has a massive savings rate to sponge that debt with using financial repression. America, not so much.

  7. “(who, yes, see destruction in nearly all portents)”

    Meh.

    The only thing zerohedge does is not see everything though rose colored glasses.

    I mean if it was a good idea to sell treasuries to china isn’t it an obvious question to ask that China dumping them might be a bad thing?

    I mean Jesus if china dumping them has zero effect presumably anyone dumping them has zero effect…why the fuck even have treasuries if the buying and dumping of them effects nothing?

    Also why doesn’t anyone but zerohedge find it it odd that China dumping US treasuries does effect China and its currency and its interest rates but for some magical reason has no effect on on the US its currency and its interest rates?

    Are treasuries the unipol dark matter particle physicists have been searching for to unify the theories of quantum mechanics and general relativity?

    1. ZH might have a point here, but you’ll have to pardon me if I’m not paying very close attention to the website that cried wolf a million times.

  8. “China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago”

    They purposefully devalued the yuan, and now they’re purposefully appreciating it?

    1. No. China never devalued the Yuan. They just stopped supporting it and widened its trading band.

  9. If China is selling all those T-bonds, someone must be buying them, and I can’t imagine who it would be. China bought them in the first place because nobody else had that much spare cash!

    So please tell us who. Or don’t you know?

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