Free Ride Over: China & Japan Bailing On Treasuries

We had a request to look at the annual change in foreign holdings of U.S. Treasury securities as an addendum to our post from last night.

It’s clear the two largest foreign creditors to the United States government are pulling the plug.  Not so much dumping their trillion dollar plus stock of holdings but engaging in slow sales and definitely no more net buying.

Not good at a time when the U.S. budget deficit is exploding and set to run a trillion hole as far as the eye can see.   At least, until the market has other ideas.

Also, interesting is the sharp decline in flows from the Cayman, which are the hedge funds domiciled offshore.

Expect the hole from China and Japan to be plugged by marginal capital flows diverted from the emerging markets, and we suspect lower credit quality corporate bonds.   The U.S. government will get funded but will have to pay more, maybe much more, and at the expense of the other borrowers.

Central banks and foreigners have accumulated almost 75 percent of stock of marketable notes and bonds.  That liquidity is drying up.   America First soon to be America Thirst?

The budget mess is about to get loopy.  That is high interest rates = higher interest payments = higher deficits = higher borrowing needs = higher interest rates.  Wash, rinse, repeat.

The free ride is over, Edgar, and winter is coming.