China and Japan Continue To Reduce Treasury Holdings

The U.S. Treasury just released the August TIC (Treasury International Capital) data at the market close.

The key takeaways:

• China and Japan, the U.S. government’s two largest foreign creditors, continue to reduce their Treasury holdings, both down $6 billion in August
• Chinese and Japanese flows into Treasury securities has reversed over $200 billion from the same period in 2017
• Foreign central banks, who hold almost 33 percent of marketable notes & bonds, [purchases are down $4 billion from Jan-Aug ’18 versus a positive $238 billion in same period last year
• Foreign central banks did increase their holdings of Treasuries by $24 billion in August, however
• Brazil led with an $18 billion increase in Treasury holdings in August
• Ireland was second, with $16 billion, which leads us to believe U.S. corps continue to stash capital offshore
• More than 50 percent of the stock of U.S. Treasury notes and bonds are still held by price-insensitive central banks, though the profile is changing
• Central banks and foreigners own almost 75 percent of marketable Treasury notes and bonds

Upshot

Markets are way too complacent, and the Trump administration is too cavalier about the economy’s increasing vulnerability caused by its dependence on foreign financing of the government’s exploding budget deficits.

Check out the trends in the data and then do the math.

With the budget deficit exploding, coupled with the Treasury having to raise an additional $300 billion plus/or minus per year to pay back the Federal Reserve as it rolls off its balance sheet, the supply of marketable Treasury securities hitting the market over the next few years will be unprecedented.

At the same, time the “free financing” of deficits provided by the central banks, including the Fed and foreign central banks, is over.   Not to mention the other factors that have kept rates low are fading.

Stay tuned!