One month ago, when we last looked at the Fed’s update of Treasuries held in custody, we noted something troubling: the number had dropped sharply, declining by over $22 billion in one week, one of the the biggest weekly declines since January 2015, pushing the total amount of custodial paper to $2.805 trillion, the lowest since 2012.
One month later, we refresh this chart and find that in last week’s update, foreign central banks continued their relentless liquidation of US paper held in the Fed’s custody account, which tumbled by another $14 billion over the course of a week, pushing the total amount of custodial paper to $2.788 trillion, a new post-2012 low.
Today, to corroborate the disturbing weekly slide in the Fed’s custody data, we also got the latest monthly Treasury International Capital data for the month of September, which showed that the troubling trend presented one month ago, has accelerated to an unprecedented degree.
Recall that a month ago, we reported that in the latest 12 months we have observed a not so stealthy, actually make that a massive $343 billion in Treasury selling by foreign central banks in the period July 2015- August 2016, something unprecedented in size.
Fast forward to today when in the latest monthly update for the month of September, we find that what until a month ago was “merely” a record $346.4 billion in offshore central bank sales in the LTM period ending August 31 has – one month later – risen to a new all time high $374.7 billion, or well over a third of a trillion in Treasuries sold in the past 12 months.
Among the biggest sellers – on a market-price basis – not surprisingly was China, which in August “sold” $28 billion in US paper (the actual underlying number while different, as this particular series is adjusted for Mark to Market variations, will be similar), bringing its total to $1.157 trillion, the lowest amount of US paper held by Beijing since 2012.
It wasn’t just China: Saudi Arabia also continued to sell its TSY holdings, and in August its stated holdings (which again have to be adjusted for MTM), dropped from $93Bn to $89Bn, the lowest since the summer of 2014. This was the 8th consecutive month of Treasury sales by the Kingdom, which held $124 billion in TSYs in January, and has since sold nearly 30% of its US paper holdings.
As we pointed out one month ago, what is becoming increasingly obvious is that both foreign central banks, sovereign wealth funds, reserve managers, and virtually every other official institution in possession of US paper, is liquidating their holdings at a very troubling pace, something which in light of the action in the past week appears to have been a prudent move.
In some cases, like China, this is to offset devaluation pressure; in others such as Saudi Arabia, it is to provide the funds needed to offset the collapse of the petrodollar, and to backstop the country’s soaring budget deficit. In all cases, it may suggest concerns about a spike in future debt issuance by the US, especially now under the pro-fiscal stimulus Trump administration.
So who are they selling to?
The answer, at least until last month, was private demand, in other words just like in the stock market the retail investor is the final bagholder, so when it comes to US Treasuries, “private investors” both foreign and domestic are soaking up hundreds of billions in central bank holdings.
As we said last month when we observed this great rotation in Treasuries out of official holders into private hands, “we wonder if they would [keep buying] knowing who is selling to them.”
Well, this month it changed, and after private investors had been happily snapping up bonds for 4 straight months, in September “other foreign investors” sold a whopping $31 billion, bringing the total outflow between public and private foreign holdings to $76.6 billion, the second highest number on record!
Meanwhile, while just three months ago yields had tumbled to near all time lows, suddenly the picture is inverted, and long-yields are surging on concerns that not only will the BOJ, the Fed, and maybe even the ECB will soon taper their purchases of the long end, but that Donald Trump is about to unleash a $1 trillion debt tsunami at a time when the Fed will not be available to monetize it.
While it is unclear under what conditions foreign buyers may come back, one thing is very clear: as of this moments the selling strike not only continues but is accelerating, and should the foreign liquidation of Treasuries fail to slow, Yellen will have no choice but to forget about hiking rates and focus on QE4 instead.
Foreign governments (i.e. central banks) are dumping the Treasury Notes they bought from us. A Treasury Note is what gets issued when the US Government BORROWS money. Whoever gives the US the money gets a Note in return. That note promises to pay X amount back over X amount of time.
Foreign governments are now selling US Debt before the notes mature.
The question is “Why?”
Well, if the US is going to war with one or more of these countries, then the countries would not want to be holding US Debt Instruments which the US could refuse to pay over a war! Or, if these countries feel that the US will be UNABLE to repay, they may want to cut their losses and get out while they can.
But the most-likely scenario is that these countries are trying to wreck the US economy, and bring us to our knees.
In order to payoff the Notes early, the cash has to come from somewhere. If all else fails, the Federal Reserve will order the Treasury to PRINT IT.
By printing the cash, it serves to DEVALUE all the rest of the cash which is already in circulation. Lessening the value of the US dollar makes EVERYTHING more expensive for Americans. As things get more expensive, people hold back. The economy stalls. And that begins a vicious circle.
The less our cash is worth, the more we have to continue printing to pay off the Notes early, so the more expensive things continue to become, so the less people are able to buy, so the economy gets slower and slower and slower, until it STOPS. Everybody is broke.
THAT is apparently what China and Saudi Arabia are trying to achieve.
The other foreign banks see what these two countries are doing, so they’re getting scared and they’re dumping Treasuries too. Which makes the cycle worse.
This is a financial attack being perpetrated upon us by China and Saudi Arabia.
They’ve been conducting this attack slowly for months, but they’ve sped things up now.
Maybe we might have to “break” them back . . . . but not with currency. . .
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