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Move Over China: Beijing Sells Whopping $34.2 Billion Treasuries In December As Japan Becomes Largest Official Holder Of US Debt

Tyler Durden's picture




 

Gradually we are getting confirmation that Chinese "posturing" about offloading US debt is all too real. The most recent TIC data confirmed the Treasury's greatest nightmare: China is now dumping US bonds. In December China sold $34.2 billion of debt ($38.8 billion in Bills sold offset by $4.6 billion in Bonds purchased), lowering its total holdings $755.4 billion, the lowest since February 2009, and for the first time in many years relinquishing the top US debt holder spot to Japan, which bought $11.5 billion (mostly in Bonds, selling $1.4 billion Bills) bringing its total to $768.8 billion. Also, very oddly, the surge in UK holding continues, providing yet another clue as to the identity if the "direct bidder" - as we first assumed, these are merely UK centers transacting primarily on behalf of China as well as hedge funds, which are accumulating US debt under the radar. UK holdings increased from $230.7 billion to $302.5 billion in December: a stunning $70 billion increase in a two month span. Yet, with the identity of the UK-based buyers a secret, it really could be anyone... Anyone with very deep pockets.

We will go through the TIC data in much more detail later; for now here is the official press release.

February 16, 2010
tg548

TREASURY INTERNATIONAL CAPITAL DATA FOR DECEMBER

WASHINGTON
– The U.S. Department of the Treasury today released Treasury
International Capital (TIC) data for December 2009. The next release,
which will report on data for January 2010, is scheduled for March 15,
2010.

Net foreign purchases of long-term securities were $63.3 billion.

  • Net foreign purchases of long-term U.S. securities were $82.2
    billion. Of this, net purchases by private foreign investors were $62.6
    billion, and net purchases by foreign official institutions were $19.6
    billion.
  • U.S. residents purchased a net $18.9 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $50.9 billion.

Foreign holdings of dollar-denominated short-term U.S.
securities, including Treasury bills, and other custody liabilities
decreased $67.7 billion. Foreign holdings of Treasury bills decreased
$53.0 billion.

Banks' own net dollar-denominated liabilities to foreign residents increased $77.7 billion.

Monthly net TIC flows were
$60.9 billion. Of this, net foreign private flows were $82.0 billion,
and net foreign official flows were negative $21.1 billion.

 

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Tue, 02/16/2010 - 10:40 | 232334 10044
10044's picture

Question is, what they've bought with the money instead? Fannie paper??!

Tue, 02/16/2010 - 10:44 | 232337 Boop
Boop's picture

Swiss Francs?

Tue, 02/16/2010 - 11:01 | 232366 LoneStarHog
LoneStarHog's picture

Gold!

Tue, 02/16/2010 - 15:15 | 232766 Anonymous
Anonymous's picture

they're buying gold indeed

Tue, 02/16/2010 - 16:25 | 232946 Anonymous
Anonymous's picture

What from their own mines? On the open market? For
what? Owning Gold in any form is part of their culture.
And they are rolling in dough over there. No surprise
like India gold represents a myriad of symbols in their
culture. Your remark shrouded in mystery, open ended,
no qualifiers suggests your long ETF's looking to
get out at a substantial profit. How about this
one? They sold treasuries to buy gold for their uptick
in jewelry demand on the mainland as everyone is
running out of things to buy with all their dough and
owning four houses has them covered for generations
to have a roof over their heads plus they have no
more vacation time this year and how many times can
you go to Hawaii anyway? Seeing as Formosa is out this year as a vacation destination. See if someone at GS is willing
to write a CDS on that trade. Then you could trade the
CDS to keep you busy if your looking for something to
do. Take into account time spent for rumor mongering
integral to successful CDS trading. Go get em Tiger cub.

Tue, 05/17/2011 - 02:06 | 1282122 Karston1234
Karston1234's picture

This is really very interesting to say the least.
Doctorate Degree
Online Nursing Degree

Tue, 02/16/2010 - 12:03 | 232444 Anonymous
Anonymous's picture

No they are responding to a global slowdown in exports
China is a net importer for almost everything with
a yuan pegged to the dollar on balance they are
spending more dollars then they are taking in. Because the dollar has appreciated 10% against the Euro of late
and the EU is a big export client of China net net it's
bad for you Walmart shoppers out there. Consider
the US Tsy holdings of China as their country checking
account with bills the most liq. to pay for running the
country. If China is buying longer dated bonds they
are merely tinkering with the average duration of
their portfolio taking advantage of higher rates
on the long end of the curve. Something to keep in
mind Bank of China can, and does investing on behalf
of their central bank and they have banking hubs in
most major financial centers in the EU. Mystery direct bidders could very well be them via an artery of the Bank of China. In Chinese DNA is stealth and secrecy. Which
I suppose to many, makes them an endless source of
fascination. End of the day you may not like their
style in the world of commerce but they do make a mean
dumpling.

Tue, 02/16/2010 - 14:12 | 232645 Anonymous
Anonymous's picture

One last thought. Nothing prevents China from buying
treasuries through some other financial entity. That
could be anyone and anywhere and in such a manner they
split up the order so it looks like a normal
business as usual bid from whomever is placing it.
There is nothing illegal in that. Just sneaky and
don't count China out in the sneakiness department.
They wear the crown in this regard. Deception is their
middle name.

Tue, 02/16/2010 - 22:50 | 233443 Anonymous
Anonymous's picture

wow, a sane rational mostly right comment on the chinese currency peg. I wonder how many folks who read/post understand how a currency peg works. Don't fall for the trope about household savings, that is an apples to oranges comparison (social security contributions are "consumption" and "consume" almost 10% of household income and easily rivals chinese household savings.) The Chinese government has all these dollars in Treasury instruments because they are running a lending operation with negative carry. They "borrow" (confiscate at the border) all the dollars it takes to keep the two currencies at the peg exchange rate. The Chinese exporters from whom the government has "borrowed" from get a nice Chinese issued bond payable in dollars and sporting a handsome 4.5% coupon. Their "borrowings" are then lent to us (or US if you prefer) in a Treasury portfolio yielding less than 2.5%. At some point the Chinese government will not have enough dollars to pay off their bonds. End of the day, currency pegs are very expensive to maintain.

Tue, 02/16/2010 - 15:19 | 232777 Anonymous
Anonymous's picture

All you guys missed the good news. Japan is now again
the largest holder of our debt. They may be Asian but
at least they are not Communist. Now when their
nose gets bent out of joint because Obama wants
to meditate with the Dalai Lama, they can't threaten
financial nuclear attack as a bargaining tool. With
any luck imports will exceed exports for awhile and
we get rid of them for good. Unfortunately we are
the only game in global town for a large, liquid,
transparent investment market. Damn I think they are
here to stay as the elephant in the room that likes
peanuts. Point one their holdings-Who cares? Point two-
the wherefores on the reality of it all-Who cares?
Go do something useful and healthy with your time
shovel snow, build a town out of legos, play with the dog, finish the jigsaw puzzle you started Sat., go rebuild Haiti.....

Tue, 02/16/2010 - 10:43 | 232335 MarketTruth
MarketTruth's picture

Hmmmm UK-based you say... very deep pockets... perhaps the House of Rothschild? After all, they do own a portion of the United States private printing press owner Federal Reserve. Maybe it was the Warburgs (Germany) or the Lazard Brothers?

www.save-a-patriot.org/files/view/whofed.html

Tue, 02/16/2010 - 10:51 | 232352 asdf
asdf's picture

maybe the china foreign office?! The PBoC has offices in the UK and HK. They buy through their foreign offices to "hide" (ok, it's not really a secret) that they already own more than 3 trillion dollars instead of "only" 2.

Tue, 02/16/2010 - 15:39 | 232832 Anonymous
Anonymous's picture

Who knows? And why do you care? You could spend the
rest of your life following their labyrinth of puzzles in puzzles. Bottom line: How much money would you make off them if they were a client and are you a part of the inner
circle? Something tells me the color of your skin and
your eyes would cause them to politely shut the door
in your face when you came knocking. Unless, you were
the pizza delivery man they got alot of mouths to
feed in their extended family and stomachs to fill to
keep the engine going and make everyone happy campers.
It's a pesky detail when you got 1.3 billion people. In
their neck of the woods they may just elect to cull
the herd and then as Joe Q citizen your in the egg
drop soup! Literally they got some weird ass eating
habits over there.

Tue, 02/16/2010 - 10:47 | 232344 Bylinka (not verified)
Bylinka's picture

Dear Tyler, having been aware of "special relationship" between the US and UK, why do not you think that US Fed could be someone buying UST under UK's off-shore cover. And what is the point of China being an open seller and a hidden direct buyer at the same time?

Tue, 02/16/2010 - 10:55 | 232357 Shameful
Shameful's picture

That's what bothers me about China being a buyer secretly, I can't fathom a reason. They already have enough $$$ to be used as a weapon if they want, their position is so large it will be hard to unwind with causing problems, and they know the dollar is a long term loser because of American fiscal and monetary policy.

I'm thinking it's more likely to be a central bank like the Fed. After all it was reported on this website the huge amount of treasuries they purchased last year maybe they are trying to change it up to keep the Tylers and Marlas of the world off the track?

Tue, 02/16/2010 - 11:01 | 232365 Bylinka (not verified)
Bylinka's picture

Yes, that was exactly what I was thinking of too.

Tue, 02/16/2010 - 12:09 | 232453 Tethys
Tethys's picture

Only reason I could think of would be to provide an anonymous weapon - they could sell off their accumulated under-the-table holdings all at once to provide an economic blow at an opportune time while whistling innocently and pointing out that their overall known holdings did not decrease significantly.  This would make it harder for the US to justify a response to the attack, or know who the attacker was.

Seems a bit tenuous given the money trail pointed out by nonclaim's comment below, so I'm guessing the fed as well.

Tue, 02/16/2010 - 14:56 | 232716 Anonymous
Anonymous's picture

they want to secretly keep devaluing their currency?

Tue, 02/16/2010 - 11:07 | 232370 nonclaim
nonclaim's picture

Do not assume China (or anybody else) can move this much money and stay hidden. It may not be officially known but it is not unknown as money leaves a distinct trail and nobody, in their right mind, would participate in a trade with an unverified/untrusted party, the clearer specially.

And what is the point of China being an open seller and a hidden direct buyer at the same time?

It is a way to "roll" into instruments with different term dates.

Tue, 02/16/2010 - 13:49 | 232604 Anonymous
Anonymous's picture

My thoughts EXACTLY.

Tue, 02/16/2010 - 18:08 | 233132 Anonymous
Anonymous's picture

And mine

Tue, 02/16/2010 - 14:09 | 232614 thomasstreet
thomasstreet's picture

This deserves a repost: PAUL CRAIG ROBERTS: AMERICA—A COUNTRY OF SERFS RULED BY OLIGARCHS

The media has headlined good economic news: fourth quarter GDP growth of 5.7 percent ("the recession is over"), Jan. retail sales up, productivity up in 4th quarter, the dollar is gaining strength. Is any of it true? What does it mean? Or is it all a lie

The 5.7 percent growth figure is a guesstimate made in advance of the release of the U.S. trade deficit statistic. It assumed that the U.S. trade deficit would show an improvement. When the trade deficit was released a few days later, it showed a deterioration, knocking the 5.7 percent growth figure down to 4.6 percent. Much of the remaining GDP growth consists of inventory accumulation.
Resd the rest here

Tue, 02/16/2010 - 15:53 | 232869 Anonymous
Anonymous's picture

To confuse you. They want to create the illusion
they are sellers as a political statement while secret
buyers as smart as hell country managers. Think before
you ask questions. Confucious once said
"That was easy no challenge in this". It's a sport for
them like football is to us. They like busy beavers
and they are just giving you busy work while they
tackle the important stuff like running a big business
China Inc.

Tue, 02/16/2010 - 10:59 | 232362 Anonymous
Anonymous's picture

It's easy isn't it? The UK buys the US debt, the US buys the UK debt - net change between the two, zero, but it looks as though the auctions are going well!

DavidC

Tue, 02/16/2010 - 12:11 | 232463 Anonymous
Anonymous's picture

I post never and read often ... so I ask in the hope that one wiser than I will respond: does this notion have a glaring flaw that I'm missing? If buying time in the *hope* that crisis will avert itself is the name of the political game these days, is this not Occam's Razor?

Tue, 02/16/2010 - 12:58 | 232526 WaterWings
WaterWings's picture

It's a big stare down with a knife at each other's throat. Nobody wants to blink (collapse) first. 40,000,000 foodstampers, and growing, with no job prospects on the horizon...we should have collapsed already. The Chinese are facing a major slowdown...with workers returning to bleak agricultural life again...civil unrest is already ongoing (brutal crackdowns and non-existent press coverage)...

There is no recovery...only bankers pulling down windfall profits each quarter. This is, and always has been, a typical prelude to war. Winner takes all?

http://www.youtube.com/watch?v=Bv4UqrWV2_U

Big (warmongering imperial) kid on the block stumbles...put your money on a food fight.

Tue, 02/16/2010 - 11:02 | 232363 Crab Cake
Crab Cake's picture

China's military controls that country, and did not the Chinese military plead to the world to sell treasuries?  Did we expect otherwise from them?

"confirmed the Treasury's greatest nightmare"

We have been "softly landed" on a precipice that is giving way no matter what anyone says or does.  It might be today, tomorrow, or five or ten years from now, but the default station destiation is clear in the distance.

Jubilee please, thank you.

Tue, 02/16/2010 - 11:02 | 232368 Zexe
Zexe's picture

China has enough of US debt, I don;t think they want more. For sure the direct bidder is a central bank, most likely the Fed, buy debt. Because, little by little, in a not too distant future, no one will want US debt anymore...the Fed will be the only one buying UST. Regardless, deflation will prevail, US cannot escape liquidity trap. 

Tue, 02/16/2010 - 11:06 | 232377 Crab Cake
Crab Cake's picture

"Regardless, deflation will prevail...."

It does feel like we are rounding another bend on the spiral of deflation, what with the sovereigns and CRE ready to default, no?

Tue, 02/16/2010 - 11:11 | 232384 asdf
asdf's picture

"China has enough of US debt, I don;t think they want more."

 

they don't buy treasuries because they like them, they buy it because they need to recycle their surplus somehow. As long as they have a huge trade surplus with the US, they will buy treasuries.

Tue, 02/16/2010 - 13:14 | 232557 DosZap
DosZap's picture

Since their SO  WISE, I  would be easing out ASAP..................

Buying more, would equal  Brain Dead.

The secret DEEP  POCKETS, is none other than ther Fed.........

Just a way  to monetize the debt, under the radar.

Thu, 02/18/2010 - 03:35 | 235194 Anonymous
Anonymous's picture

Liquidity is one thing, solvency is another subject entirely. With the baby boombers retiring soon, and benefits coming online the US will have no choice but to print and devalue the dollar. If they do not savings would skyrocket and the US consumer economy would collapse.

Even then the value of a currency is based upon a nations output, when the consumer economy collapses what is supposed to replace it? GDP would collapse as well thus driving the dollar down. The banks were already overleveraged a decade ago and still lent to the public. There has only been inflation not deflation for the past ten years, the only difference with 2008 is that more capital derived from that bout of inflation went into US Government debt and dollars more so than other asset classes. That capital used to purchase to US debt and dollars was fraudulently issued by US banks which then powered US creditors/exporters to begin with.

Tue, 02/16/2010 - 11:04 | 232371 Anonymous
Anonymous's picture

I've got news for the bulls. The reflation trade is dead. The government's lying to you. The economy is not recovering. It's deteriorating rapidly. You stupid fuckers shouldn't have drank the kool-aid. The market's about to crash. The criminal Federal Reserve is losing control of the market.

Tue, 02/16/2010 - 12:01 | 232440 Oso
Oso's picture

the near complete absence of ANY volume pretty much means that the majority of people dont really believe this rally.  But, because of the perverse incentive to be invested, idiot money managers wont get out until everyone else is forced to.  It doesnt matter if you lose peoples' money, as long as everyone else is losing it at the same time.

 

To this point, however, doesnt unloading treasuries seem to be in-line with a currency revaluation...?  You'd want to buy back as many yuan before revaluing upwards, no?

Tue, 02/16/2010 - 11:05 | 232372 Anonymous
Anonymous's picture

Could the secret buyer is Fed?

Tue, 02/16/2010 - 11:05 | 232373 Cyan Lite
Cyan Lite's picture

Doesn't this mean a weaker dollar, and thus green shoots?

Tue, 02/16/2010 - 11:09 | 232382 Anonymous
Anonymous's picture

Buy gold, it's not too late yet.

Tue, 02/16/2010 - 12:50 | 232523 loki
loki's picture

Up $25 already today....  was hoping, praying for the "9" handle to back up the truck but no such luck. 

 

Please please please, just one giant dip so I can get a bit more?? 

 

Tue, 02/16/2010 - 12:58 | 232533 Anonymous
Anonymous's picture

Two weeks ago, I was waiting for the 950 to buy with
both of my hands. However, my friend, a gold coin
dealer, told me "no way."

Tue, 02/16/2010 - 11:06 | 232376 THE DORK OF CORK
THE DORK OF CORK's picture

Its the Greeks , Irish ,Portuguese and the Spanish - they are converting their euros into FRNs before their paper is converted into Drachmas , punts ,escudos and pesetas.

Only joking..... I hope.

Tue, 02/16/2010 - 11:40 | 232414 bugs_
bugs_'s picture

My thoughts exactly.  No joke.  Perhaps not the
governments but the oligarchs' families.

Tue, 02/16/2010 - 11:08 | 232380 Anonymous
Anonymous's picture

If you were Chinese, what would you do?

Tue, 02/16/2010 - 12:43 | 232514 merehuman
merehuman's picture

If i were chinese i would be whistling.

New roads, new cars and more spending power plus a little gold as the state suggests. Yes im a yellow fellow and i own the world. Jusy feeling grateful the long term plan to put the usa down has worked. And our banker friends in the usa were a big help.

Tue, 02/16/2010 - 11:09 | 232381 Anonymous
Anonymous's picture

The mechanics of what they did probably increased their expsoure to the U.S. They sold their ultra short paper and bought the long end? That's not really an expression of nervousness on a credit.

Tue, 02/16/2010 - 11:10 | 232383 Alex in SFBA
Alex in SFBA's picture

It's inevitable. US imports dropped by $70 bil a year, almost all of it at China's expense. China, on the other hand, is on the stimulus rampage building train service to nowhere, empty offices and appartments. All of it requires resources, which require dollars. They don't have a choice but to sell their holdings to keep the music going on a little longer..

I beleive the money that doesn't go to China now will easily find it's way to UST. In other words, we're going from this:

US consumer -> China -> UST, to this

US consumer -> UST.

 

Tue, 02/16/2010 - 12:04 | 232445 Oso
Oso's picture

exactly.  once all of this is exhausted, then yields will rise permanently.  but not yet.  not yet.

Thu, 02/18/2010 - 03:45 | 235199 Anonymous
Anonymous's picture

People in Europe were saying the same thing about America's infrastructure buildup during the 19th century. China's stimulus and investments have been more efficient and targeted approaches.

Tue, 02/16/2010 - 11:12 | 232387 Anonymous
Anonymous's picture

Quid pro quo, you buy our useless paper and we will support the market in yours. How many gilts has the Fed got?

Either that or the markets are lining up for a complete £ collapse.

Tue, 02/16/2010 - 11:22 | 232393 Going Down
Going Down's picture

 

"China is now dumping US bonds"

 

First off, I would not call a 4.5% decline in one asset class "dumping." For a few years now China has been realigning its foreign reserve positions; for USD-denominated assets, the most significant trend is the shift from Agencies to Treasuries (and to a limited extent direct equity investments through its sovereign wealth fund). Because China's accumulated USD reserves comprise a disproportionate share of total FX holdings (around 80% if I remember correctly), it makes perfect investment sense to diversify.

 

In its drive to diversify, you will note a distinct focus on natural resources. Not to say that the USD will be worthless but when a country has $2T to $3T saved, it makes perfect sense to "dump" 4.5% of your paper for commodities, including gold.

 

If and when China truly "dumps" its Treasuries, you will see the price action in markets all around the world. The fall would be simultaneous, explosive even, and no other investor will be fast enough to get out of their positions. Why? Because it would be war.

 

Tue, 02/16/2010 - 11:33 | 232405 Cyan Lite
Cyan Lite's picture

Agreed, sensationalist headline...

Tue, 02/16/2010 - 11:58 | 232436 Anonymous
Anonymous's picture

From CNBS:

The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.
--------------

Doesn't sound like a sensationalist headline to me

Tue, 02/16/2010 - 13:12 | 232548 carbonmutant
carbonmutant's picture

 +3

 Chinese selling treasuries is not a problem unless it triggers a failed auction in the US.

 

 

Tue, 02/16/2010 - 15:20 | 232780 MarketTruth
MarketTruth's picture

How can the USA have a 'failed' auction when the Federal Reserve has a printing press and low-and-behold a secret entity of 'direct' buyers are now in play?

Tue, 02/16/2010 - 15:29 | 232808 carbonmutant
carbonmutant's picture

 If your scenario is right then Chinese selling will never be a problem.

Tue, 02/16/2010 - 11:23 | 232395 assumptionblindness
assumptionblindness's picture

Let's face it.  We will never know who was/is behind the UK purchases...the bigger issue is what happens over the next couple of quarters of US debt issuance. 

Wasn't the whole world waiting for the day to come when China became a net SELLER of treasuries?  Well, that day has arrived (rather quietly, too).

It may now only be a short time before a panic rush to the exit begins.  The bottleneck will be reminiscent of front door of The Stationin Rhode Island when Great White lit the place on fire a decade ago.  Just look around, folks.  There are a lot of FAT people who own treasuries.  Thanks to the UK we can move closer to the door before the shout "FIRE!" erupts. 

Tue, 02/16/2010 - 11:38 | 232412 Anonymous
Anonymous's picture

Have you forgotten that the doors were locked?

Tue, 02/16/2010 - 12:36 | 232501 Anonymous
Anonymous's picture

>>
Let's face it. We will never know who was/is behind the UK purchases...
>>

Why not look at the data and say . . . the data says the UK bought, so they did.

Done. Full stop.

They don't have to be a front for a dark mysterious someone. They bought US treasuries. So did Japan. China wants out and got out. There was a ready replacement for them. End of story. Actually . . . boring.

Tue, 02/16/2010 - 11:30 | 232399 Anonymous
Anonymous's picture

The blind leading the lame...

Tue, 02/16/2010 - 11:31 | 232401 Anonymous
Anonymous's picture

The blind leding the lame...

Tue, 02/16/2010 - 11:33 | 232403 AnonymousMonetarist
AnonymousMonetarist's picture

Of course you are correct that UK has served as a proxy for China and Carribean (hedgies).

One reason China would buy in secret would be to offset the general Chinese public opinion that U.S. debt is toxic and that the U.S. is setting up the Chinese for a big loss. Conspiracy theories in China towards U.S. intentions is a mainstream pop culture phenomena, and is often parroted in private by top officials.

Tue, 02/16/2010 - 11:56 | 232407 hedgeless_horseman
hedgeless_horseman's picture

The UAW/O'POTUS heavies may want to lay off the U.S. auto safety inspectors and let some of Toyota's Alar apples through, or the Jap.bizs may forget that they hate the Chi.coms more than America. 

Maybe we don't worry much about a security threat from either the Chi.coms or the Jap.bizs because we are 2-1-1 against their conference?   

Tue, 02/16/2010 - 11:41 | 232415 bugs_
bugs_'s picture

Japan is essentially a GSE.

Tue, 02/16/2010 - 11:59 | 232427 hedgeless_horseman
hedgeless_horseman's picture

Agreed.  A big toxic GSE of which even a small appropriately exported portion could make LehBros look like a fart-in-a-wind-storm. 

Asymmetric warfare is a mofo, so it behoves the U.S.gov to keep the game 2 on 1, versus 1 on 2.  O'POTUS's simultaneous foreign policy initiatives of Taiwan/Lhama + the Toyota Alar apple scare presses the Pacific triangle in an bad way.

That said, long or short Korea?

Tue, 02/16/2010 - 13:04 | 232539 WaterWings
WaterWings's picture

Long agriculture. It's what Blackrock, Soros, and the Squids are doing over there.

Tue, 02/16/2010 - 11:43 | 232417 DaveyJones
DaveyJones's picture

Take the posture idea out to pasture. They will keep disengaging.

Tue, 02/16/2010 - 11:46 | 232418 poydras
poydras's picture

In the context of China having to recycle USD, selling $30B in one month seems like dumping to me.

Tue, 02/16/2010 - 11:46 | 232421 Anonymous
Anonymous's picture

It now makes sense that China will allow yuan to strenghten and focus internally for growth.

Tue, 02/16/2010 - 11:48 | 232423 poydras
poydras's picture

The UK jump is curious indeed...

Tue, 02/16/2010 - 12:01 | 232441 THE DORK OF CORK
THE DORK OF CORK's picture

Yes once certain people offload their Sterling positions there could be a major fall in that currency .

Watch this space.......

Tue, 02/16/2010 - 11:54 | 232432 DRju
DRju's picture

This has deep ramification if it continues. WHo will be next? The door locked

Tue, 02/16/2010 - 12:29 | 232488 Anonymous
Anonymous's picture

Why is not a cigar a cigar? Japan increased its holdings. The UK increased its holdings.

Period.

There doesn't have to be anything deep and dark and complex. China wants out. They are getting out. Japan and the UK replaced them. Done.

Tue, 02/16/2010 - 12:58 | 232535 IveBeenHad
IveBeenHad's picture

 

DONT BE MISLEADING! The largest holder of US Treasury is the Social Security Trust w/ almost 3 trillions dollars!!!! China is the largest foreign holder. Guys I've said it once and i'll say it again that America just owes itself and if need be social security trust will just buy more. look to it as the mysterious direct bidder. Geeeeeeez.  I do not like to be mislead and this title is misleading.  

 

http://www.ssa.gov/cgi-bin/investheld.cgi

 

Tue, 02/16/2010 - 13:06 | 232541 WaterWings
WaterWings's picture

Typical. High on your own supply. But we've seen this with every fiat currency - always ends the same - we just never know how much is left in the hourglass.

Tue, 02/16/2010 - 13:09 | 232545 THE DORK OF CORK
THE DORK OF CORK's picture

Hey maybe yee guys over there will started saving again  - a strange idea I know but you never know it could work.

Tue, 02/16/2010 - 13:23 | 232571 hedgeless_horseman
hedgeless_horseman's picture

Again?  Not any more likely than wee Irish sobering up and getting UE under control.

Tue, 02/16/2010 - 13:32 | 232586 THE DORK OF CORK
THE DORK OF CORK's picture

A American who thinks he is a alcoholic can solve his problem very easily - move to Ireland.

Tue, 02/16/2010 - 13:26 | 232576 Anonymous
Anonymous's picture

Don't 'spose anybody noticed that net net bills were sold
and bonds were bought. Doh!!! I guess I'll have to keep my
WSJ subscription, Tyler.

Tue, 02/16/2010 - 23:28 | 233488 Anonymous
Anonymous's picture

Ok, so I read ALL the comments and I'm shocked that nobody is focusing on what's important. This one short anonymous post nailed it, and nobody seems to want to discuss it. So I'll try elaborating a bit. From the Tyler's original article:

>...the Treasury's greatest nightmare: China is now dumping US bonds.

I agree that China dumping bonds would be a nightmare for the U.S., and it's one I've been expecting for a long time. But the headline directly contradicts Tyler's next sentence!

>China sold $34.2 billion of debt ($38.8 billion in Bills sold offset by $4.6 billion in Bonds purchased)

So they're not "dumping bonds" at all. Quite to the contrary they are selling short-dated bills while actually buying the interest rate risk at the long end of the curve!

If China had started dumping their holdings from the long end of the curve, I'd feel like I understood what was going on: They finally wised up to the absurdity of taking the interest rate risk inherent to holding long-dated debt owed by an insolvent borrower who has the ability to dilute the currency before paying it back. That would make perfect sense to me.

But China dumped 38.8b in bills and then purchased longer-dated bonds??? That almost sounds like they are trying to intentionally make their own situation worse! I cannot for the life of me comprehend what would motivate them to do such a thing. If we were talking about Joe Q. Public moving out the curve looking for higher yields, I would write it off to Joe Q. being too naive to understand the enormous interest rate risk such a move creates. But the Chinese government is clearly smarter than that.

There is something really important going on here and both Tyler's original article and you guys in the comments are missing it. I don't pretend to understand what it is, but it would be awesome if someone wanted to talk about the real issue rather than spouting off about this or that conspiracy theory...

Wed, 02/17/2010 - 02:46 | 233666 Tethys
Tethys's picture

I'm definitely not an expert (and somewhat prone to conspiracy theories, or, more kindly put, looking for an underlying pattern or cause to seemingly unrelated or puzzling events), but your point was clearly laid out and made me think.

Isn't it relevant to your argument that they sold $38.8 billion, but only bought $4.6 billion in bonds?  It seems to me that the goal was to dump $34.2 billion in debt, and the bond purchase was just misdirection - e.g., to give the impression that they have confidence in the long term prospects  of the US while unloading as much debt as they can.

When you find something like this that clearly doesn't make sense, it may be an indication that one or more of your underlying assumptions are wrong.  This may be the case if you assume that the Chinese believe they have a chance in hell of ever being fully repaid on their longer term investments in the US.  Sure they threw away another $4.6 billion, but they have to keep markets calm while they unload as much of their shorter term stuff as possible - some might consider that a wise investment and the reason they went for the longer end of the curve (maximum bang for the buck in terms of conveying confidence).

For those of us who tend towards conspiracy theories, once you take in the possibility that the Chinese have essentially written off a huge portion of their investment, it's fun to guess at the end game.  My current favorite theory du jour is that they are selling the short term stuff that they feel they still have a chance at, misdirecting with long term stuff, and buying a chunk under the table via the UK.  When the time comes, they will sell off the under-the-table lot at a strategic point, thereby causing a failed auction and the end of the US as we know it, with no smoking gun pointing to themselves as the culprit.  Then they de-peg their currency, take the loss on remaining outstanding longer-term treasuries, and slip into their new role as dominant superpower.

Of course my lack of in-depth knowledge of the markets and what is truly going on probably made that last paragraph a waste of time for anyone who read it. Please accept my apology in advance.

Wed, 02/17/2010 - 15:56 | 234416 WaterWings
WaterWings's picture

Either way it was a good read. Better to get the idea out there then to worry if some asshole like me doesn't agree.

Thu, 02/18/2010 - 01:09 | 235109 Anonymous
Anonymous's picture

Thanks for the reply, and BTW sorry for the anonymous posts. I'm still awaiting approval of my account and cannot yet login to this site.

Actually, I don't find your thinking to fall at all into what I think of in association with the term "conspiracy theory". There were a few other posts in the comments that just seemed uninformed and pointless, and I was reacting to those. I hope that you as a self-identified conspiracy-oriented person did not take offense.

What we know for sure is that the Chinese have to be smart enough to know they're never going to be paid back in real terms, and we can logically assume that they are balancing a political agenda against the obvious goal of trying to get as much value as they can out of the US treasury market before it collapses. Of course avoiding being the cause of that collapse for as long as possible should be part of their strategy. I don't think it "conspiracy minded" at all to speculate about how they might approach that strategy.

After thinking more about it, my best guess is that the reason they started selling on the short end was that (1) most observers have been watching for them to take action on the long end, (2) there is more liquidity there so they can dump more without moving the market, and (3) given the timing of the TIC reports, it would make sense for them to try to confuse the market with their first moves (disclosed in the recent TIC report), then start getting serious with their real strategy after sending the market a disinformation signal. So I predict the next TIC report will tell us much more about what they're really up to.

Thanks again for the reply, and by the way even as someone who detests the Alex Joes style of "conspiracy talk", I fear that your scenario about China setting itself up to be able to cause the economic collapse of the USA so as to become the next world superpower is not at all implausible. We don't have enough evidence to actually conclude that yet, but it makes perfect sense.

xPat

Tue, 02/16/2010 - 13:31 | 232584 Slewburger
Slewburger's picture
"Japan Becomes Largest Official Holder Of US Debt"

Keyword official.... I'm not worried. The Fed picked that crap up without blinking. The black hole is looming.

Tue, 02/16/2010 - 13:34 | 232588 Gordon_Gekko
Gordon_Gekko's picture

Sell China, SELL!

Tue, 02/16/2010 - 13:51 | 232609 Anonymous
Anonymous's picture

Moderator: Why did you delete my post?

Tue, 02/16/2010 - 14:07 | 232613 thomasstreet
thomasstreet's picture

This deserves a repost: PAUL CRAIG ROBERTS: AMERICA—A COUNTRY OF SERFS RULED BY OLIGARCHS

The media has headlined good economic news: fourth quarter GDP growth of 5.7 percent ("the recession is over"), Jan. retail sales up, productivity up in 4th quarter, the dollar is gaining strength. Is any of it true? What does it mean? Or is it all a lie

The 5.7 percent growth figure is a guesstimate made in advance of the release of the U.S. trade deficit statistic. It assumed that the U.S. trade deficit would show an improvement. When the trade deficit was released a few days later, it showed a deterioration, knocking the 5.7 percent growth figure down to 4.6 percent. Much of the remaining GDP growth consists of inventory accumulation.

More than a fourth of the reported gain in Jan. retail sales is due to higher gasoline and food prices. Questionable seasonal adjustments account for the rest.

Productivity was up, because labor costs fell 4.4 percent in the fourth quarter, the fourth successive decline. Initial claims for jobless benefits rose. Productivity increases that do not translate into wage gains Cannot Drive the consumer economy.

Housing is still under pressure, and commercial real estate is about to become a big problem.

The dollar’s gains are not due to inherent strengths. The dollar is gaining because government deficits in Greece and other EU countries are causing the dollar carry trade to unwind. America’s low interest rates made it profitable for investors and speculators to borrow dollars and use them to buy overseas bonds paying higher interest, such as Greek, Spanish and Portuguese bonds denominated in euros. The deficit troubles in these countries have caused investors and speculators to sell the bonds and convert the euros back into dollars in order to pay off their dollar loans. This unwinding temporarily raises the demand for dollars and boosts the dollar’s exchange value.

The problems of the American economy are too great to be reached by traditional policies. Large numbers of middle class American jobs have been moved offshore: manufacturing, industrial and professional service jobs. When the jobs are moved offshore, consumer incomes and U.S. GDP go with them. So many jobs have been moved abroad that there has been no growth in U.S. real incomes in the 21st century, except for the incomes of the super rich who collect multi-million dollar bonuses for moving U.S. jobs offshore.

Without growth in consumer incomes, the economy can go nowhere. Washington policymakers substituted debt growth for income growth. Instead of growing richer, consumers grew more indebted. Federal Reserve chairman Alan Greenspan accomplished this with his low interest rate policy, which drove up housing prices, producing home equity that consumers could tap and spend by refinancing their homes.

Unable to maintain their accustomed living standards with income alone, Americans spent their equity in their homes and ran up credit card debts, maxing out credit cards in anticipation that rising asset prices would cover the debts. When the bubble burst, the debts strangled consumer demand, and the economy died.

As I write about the economic hardships created for Americans by Wall Street and corporate greed and by indifferent and bribed political representatives, I get many letters from former middle class families who are being driven into penury. Here is one recently arrived:

"Thank you for your continued truthful commentary on the 'New Economy.' My husband and I could be its poster children. Nine years ago when we married, we were both working good paying, secure jobs in the semiconductor manufacturing sector. Our combined income topped $100,000 a year. We were living the dream. Then the nightmare began. I lost my job in the great tech bubble of 2003, and decided to leave the labor force to care for our infant son. Fine, we tightened the belt. Then we started getting squeezed. Expenses rose, we downsized, yet my husband's job stagnated. After several years of no pay raises, he finally lost his job a year and a half ago. But he didn't just lose a job, he lost a career. The semiconductor industry is virtually gone here in Arizona. Three months later, my husband, with a technical degree and 20-plus years of solid work experience, received one job offer for an entry level corrections officer. He had to take it, at an almost 40 percent reduction in pay. Bankruptcy followed when our savings were depleted. We lost our house, a car, and any assets we had left. His salary last year, less than $40,000, to support a family of four. A year and a half later, we are still struggling to get by. I can't find a job that would cover the cost of daycare. We are stuck. Every jump in gas and food prices hits us hard. Without help from my family, we wouldn't have made it. So, I could tell you just how that 'New Economy' has worked for us, but I'd really rather not use that kind of language."

Policymakers who are banking on stimulus programs are thinking in terms of an economy that no longer exists. Post-war U.S. recessions and recoveries followed Federal Reserve policy. When the economy heated up and inflation became a problem, the Federal Reserve would raise interest rates and reduce the growth of money and credit. Sales would fall. Inventories would build up. Companies would lay off workers.

Inflation cooled, and unemployment became the problem. Then the Federal Reserve would reverse course. Interest rates would fall, and money and credit would expand. As the jobs were still there, the work force would be called back, and the process would continue.

It is a different situation today. Layoffs result from the jobs being moved offshore and from corporations replacing their domestic work forces with foreigners brought in on H-1B, L-1 and other work visas. The U.S. labor force is being separated from the incomes associated with the goods and services that it consumes. With the rise of offshoring, layoffs are not only due to restrictive monetary policy and inventory buildup. They are also the result of the substitution of cheaper foreign labor for U.S. labor by American corporations. Americans cannot be called back to work to jobs that have been moved abroad. In the New Economy, layoffs can continue despite low interest rates and government stimulus programs.

To the extent that monetary and fiscal policy can stimulate U.S. consumer demand, much of the demand flows to the goods and services that are produced offshore for U.S. markets. China, for example, benefits from the stimulation of U.S. consumer demand. The rise in China’s GDP is financed by a rise in the U.S. public debt burden.

Another barrier to the success of stimulus programs is the high debt levels of Americans. The banks are being criticized for a failure to lend, but much of the problem is that there are no consumers to whom to lend. Most Americans already have more debt than they can handle.

Hapless Americans, unrepresented and betrayed, are in store for a greater crisis to come. President Bush’s war deficits were financed by America’s trade deficit. China, Japan, and OPEC, with whom the U.S. runs trade deficits, used their trade surpluses to purchase U.S. Treasury debt, thus financing the U.S. government budget deficit.

The problem now is that the U.S. budget deficits have suddenly grown immensely from wars, bankster bailouts, jobs stimulus programs, and lower tax revenues as a result of the serious recession. Budget deficits are now three times the size of the trade deficit. Thus, the surpluses of China, Japan, and OPEC are insufficient to take the newly issued U.S. government debt off the market.

If the Treasury’s bonds can’t be sold to investors, pension funds, banks, and foreign governments, the Federal Reserve will have to purchase them by creating new money. When the rest of the world realizes the inflationary implications, the US dollar will lose its reserve currency role. When that happens Americans will experience a large economic shock as their living standards take another big hit.

Tue, 02/16/2010 - 14:12 | 232642 caconhma
caconhma's picture

One has to be blind and naive to assume that the USA and China will be able to sort out their geopolitical differences. Consequently, the both sides position themselves for an imminent confrontation.

The wildest card in this game is Russia. Specifically, who will rule Russia and what national interests they will pursue.

As of today, Russia is in a very deep political and economic crisis. Their leaders are more interested in hoarding their loot into foreign banks rather than to care about their own country and its people. On a top of everything, Russia has no real army to protect its territory. All what they could do is to fight 5-million people Georgia. At the same time, close to 100 millions Chinese live in a 50-miles wide and many thousands miles long strip along Russian's boarder. As in the case of the USA and Mexico,  millions Chinese will flood across the Russian boarder from China. Add to it the fact that Russian population is shrinking quite fast.

As for the USA, it is in a midst of its own deep crisis both political and economic. America ruling elite is to corrupt, incompetent, and intellectually bankrupt. Consequently, the USA cannot afford immediate or near-term confrontation with China (the USA are already involved in many wars it cannot win, specifically Afghanistan, Iraq, Pakistan, Somalia, the Muslim world). At the same time, the time is on China's side.

Tue, 02/16/2010 - 14:32 | 232677 Anonymous
Anonymous's picture

Golly gee whillikers....Treasuries reversed and are now
up. Must be the that conspiracy of foreign bill sellers and bond buyers.

Tue, 02/16/2010 - 16:41 | 232980 Anonymous
Anonymous's picture

How much of that debt could we retire by selling the Japanese General Motors?

Tue, 02/16/2010 - 17:09 | 233049 Anonymous
Anonymous's picture

Another $50b will be dumped the moment Obama shakes hands with Dalai, and another $50b when the arms were delivered to Taiwan.

Tue, 02/16/2010 - 17:25 | 233075 Anonymous
Anonymous's picture

Fed will just print more paper, everyone seems to think that this will end badly, but how?

Tue, 02/16/2010 - 17:26 | 233078 Anonymous
Anonymous's picture

Unlike China, Japan is an occupied country. They are probably not as anxious to buy our debt as some may wish to believe.

Tue, 02/16/2010 - 18:38 | 233171 Anonymous
Anonymous's picture

Looks to me like the UK is a backdoor for the Fed to buy its own garbage.

Wed, 02/17/2010 - 00:58 | 233596 Anonymous
Anonymous's picture

Some towns and businesses print their own money.

Wed, 02/17/2010 - 18:03 | 234621 Anonymous
Anonymous's picture

This ignores the laws of international finance. As long as China pegs the dollar and runs a current accounts surplus, it will not be able to selloff large amounts of US treasuries.

Read the explanation at http://economistatlarge.com/featured-articles/risk-chinese-selloff

Wed, 02/17/2010 - 21:03 | 234879 Anonymous
Anonymous's picture

why is the UK buying US debt?

Wed, 02/17/2010 - 21:56 | 234944 Chaz
Chaz's picture

Yet, with the identity of the UK-based buyers a secret, it really could be anyone... Anyone with very deep pockets.

I call shenanigans!  More manipulation by Englishmen?  On it's surface I'd call more hijinks by the BOE.

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Thu, 12/09/2010 - 02:37 | 791704 william.smith61
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Fed will just print more paper, everyone seems to think that this will end badly, but how?

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This ignores the laws of all-embracing finance. As continued as China pegs the dollar and runs a accepted accounts surplus, it will not be able to selloff ample amounts of US treasuries.

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Americans received yet another sobering reminder of China’s increasing economic strength and international clout this week. China sold a record amount of U.S. debt in December, raising speculation that Beijing is turning bearish on America.

Chinese investment in U.S. government securities dropped by $34.2 billion at the end of 2009 to $755.4 billion according to newly released figures from the Treasury Department. The decline is the greatest since Treasury data on Chinese holdings began in 2000.70-648

Beijing’s cutback on the greenback puts Japan in the lead as the largest holder of US Treasury securities. Japan and Britain increased their holdings of U.S. long term securities in December but global demand still fell sharply. Foreign holdings of US Treasury securities plummeted by a whopping $53 billion, surpassing the previous record drop of $44.5 billion in April of 2009.70-649

Beijing is leading the move away from U.S. debt instruments as President Barack Obama increases government borrowing to unprecedented levels to sustain economic recovery. In December, Obama increased the size of the marketable U.S. Treasury stock to a stunning record level $7.27 trillion.

If the trend continues, the United States will be forced to raise interest rates. That would put yet another strain on America’s ability to manage its mountain of debt.

Speculation about China’s intent has been running wild since the figures were released. Relations between Beijing and Washington are worsening almost daily. The deepening spat over Tibet, a controversy over U.S. arms sales to Taiwan, China's dispute with Google (GOOG) and trade and currency disagreements are still festering. In the latest dispute, President Barack Obama's administration rejected Beijing's demand to cancel his meeting this week with the Dalai Lama.70-652

Some analysts warn that China might be cutting purchases of U.S. Treasuries to flex its financial muscle. If so, Beijing’s economic leverage has its limits. America’s economic house is terribly fragile. Putting too much pressure on the U.S. economy could destroy America’s recovery or wreak even worse damage.

But Beijing is nothing if not pragmatic and there’s little chance that they would want to wreck the economy of their biggest customer, at least not now.

Most probably China is actively diversifying its holdings of foreign currency to defend its investments in dollar-denominated instruments against a decline in the greenback caused by excessive U.S. indebtedness.70-653

Beijing holds most of the cards in this game. It is a chilling turn of events to realize that America’s economic viability lies at the mercy of a foreign power. It is even more unsettling to consider that Washington is consumed in political gridlock and is either unaware of the danger or unable to restore the underpinnings of a sound, sustainable economy.

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Wed, 02/23/2011 - 02:12 | 987760 shawnlee
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Regardless, deflation will prevail...."

It does feel like we are rounding another bend on the spiral of deflation, what with the sovereigns and CRE ready to default, no?
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