Presenting The Plunge In Foreign Interest For US Treasurys

Tyler Durden's picture

There has been much speculation recently about whether or not China is or isn't dumping its holdings of US Treasurys. Spoiler alert: it isn't. At least not outright. After all, it still is not a self-sustaining economy and as such relies on what's left of the US middle class to purchase its production. In fact, according to the latest TIC data, after 5 months of declines, Chinese UST holdings increased in April 2011. The problem with TIC is that it is woefully late. It is also terribly unpredictable and subject to annual adjustments which see hundreds of billions adds or subtracted from estimated holdings. Furthermore much has happened in the period between April and the first week of July. Namely the end of QE2. Furthermore many will note that there has been little if any change in market sentiment to Treasury paper now that QE2 is over (which is actually very much untrue after last week we saw the biggest percentage blow out in the 5 Year in history). But for the best indication of what non-US based buyers of Uncle Sam's paper think about the desirability of said paper, we went to the source, and compiled all Auction issuance data since the June 2009 bidder reclassification rules. The result is quite striking. Over the past 2 years, foreign demand, expressed by the final take down as a percentage of total auction size across the entire curve (2,3,5,7,10, and 30 Year) has plummeted from 55% to just below 35% as of the last auction.

Stated otherwise, and as seen on Chart 2 below, Primary Dealers (mostly) and Direct Bidders (to a very minor degree) now account for roughly two thirds of all Treasury placement. The problem is that Dealers no longer can flip their holdings to the Fed as Zero Hedge had been demonstrating POMO after POMO. And since the debt ceiling will be raised, and since nothing in Washington will change vis-a-vis deficit spending when all the posturing smoke and mirrors clear, the Treasury will have no choice but to issue another $2 trillion in debt over the next year. 

The only question is who will it sell it to?

And yes, there will be demand, even foreign demand, for Uncle Sam's paper. But at what price. Certainly not at prevailing rates.

We may have our answer as soon as next week's issuance of $66 billion in 3, 10 and 30 year paper. Because if the recent issuance of 2, 5, and 7 Years was any indication about foreign interest, watch out below.

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HungrySeagull's picture

Hate to say it, but they will raise the Debt Limit, the People will rejoice and we will revisit the issue after Elections are over and done with.

SOLnow's picture

Raising the debt ceiling solves nothing.  Political drama for the masses.  No QE = no funding at current rates.

TruthInSunshine's picture

Shorting U.S. Treasuries is going to be the best play on tnotes since going long U.S. Treasuries was...in...oh...about circa 1981 when it was yielding nearly 16% (had one bought a 30 year tnote in 1981 they'd had been able to sell it for a MASSIVE gain by 1985 when new issuances yield 7.5% -

I'll leave it for everyone to do the math on the spread in yields over the remaining 26 years to maturity.

Popo's picture

Easy solution to all this -- just start paying people's SS payments in Treasuries.   "Here's your cash granny,  you just can't spend it for 30 years."

 

 

Oh regional Indian's picture

Popo, actualy the elephaunt in the rom with regards to this issue is the fact that the UK is not buying anymore. And how could it. Unless there was some backdoor FED pump.

I remember 3-4 months ago, being shocked by the size and % of UK's purchase.

Tylesr? Isn't that the missing piece here?

Imagine, with all the bad news currently in the UK if the news on the street was that the GBP is backstopping the USD via junk paper purchases. 

ORI

http://aadivaahan.wordpress.com/2011/07/08/july-15th-aug-15th-month-long-window-coming-up-initial-thoughts/

 

richard in norway's picture

i think the brits have decided to tie the pound to the dollar and will continue to buy T bills. i'm not sure what the payoff is but it must have something to do with the discount window and brit banks

unununium's picture

You diplay a remarkable belief in the illusions presented.

The GBP and USD are, if not the same currency, two windows into the same corrupt manipulative good-cop bad-cop, teeter-totter system.

Who's to say the Fed and BOE have not issued offsetting 50-year swaps and that each is free to buy as much of the other's sovereign offerings as their ponzi counterfeit oligopolistic selves see fit?

These central banks' credibility is completely shot at this point.

 

TruthInSunshine's picture

Given that our Dearly Beloved and Benevolent Federal Reserve Non-Bank is a literal offshoot of the Bank of England, no one studying history should find this surprising.

Fractional Reserve Banking that intentionally booms and busts economies for harvest time for the true owners, FTL!

(For the Loss)

Oh regional Indian's picture

Plausible theory unun. And plausibly deniable too.

ORI

Ghordius's picture

I was also shocked by the UK's size of it.

It must have some relevance.

ViewfromUndertheBridge's picture

Middle East and some Chinese buying come through London

TruthInSunshine's picture

Popo, actualy the elephaunt in the rom with regards to this issue is the fact that the UK is not buying anymore. And how could it. Unless there was some backdoor FED pump.

I remember 3-4 months ago, being shocked by the size and % of UK's purchase.

Tylesr? Isn't that the missing piece here?

Imagine, with all the bad news currently in the UK if the news on the street was that the GBP is backstopping the USD via junk paper purchases. 

ORI

http://aadivaahan.wordpress.com/2011/07/08/july-15th-aug-15th-month-long-window-coming-up-initial-thoughts/

 

Fantastic point, ORI.

Fantastic!

Few people either realize or focus on the fact that the British and Dutch (and the Dutch especially on a proportionate scale - as in amount of total inflows into treasuries as a % of total expenditures) have been two massive buyers of U.S. Treasuries for some time.

Oh regional Indian's picture

Interesting TIS. The Dutch too. 

The Dutch East India Company. The British East India Company.

Hmmmmmmmm.....

Looks like an old game of pass the parcel crossed with musical chairs and snakes and ladders.

ORI

 

jeff montanye's picture

i'm going with revisit it sooner.

thunderchief's picture

They have already raided government pensions.  I say IRA's and 401K's will be next if the  bond market tanks.  They will need a buyer of last resort and those funds are just sitting there with a government fence around them.  They will grab it and put obscene penalties on anyone trying to cash out of them.

No Bid's picture

Before they did that they would reconsider the federal tax exemption of municipals, something that's already been whispered about, and definitely something to keep an eye on going forward.

 

Tom_333's picture

It may not be the British buying.I could be purchase through the City.The Brits are broke.Who may then be the endbuyer....the Fed?

LetThemEatRand's picture

Anyone else see that cliff up ahead where the road ends?

papaswamp's picture

Silliness I say silliness...road is fine...."Jeebs drive faster!"

FEDbuster's picture

The road is as long as the FED's balance sheet is high.  QE to infinity and beyond!!

Ben Bernanke is "Mr. Creosote"

http://www.youtube.com/watch?v=rXH_12QWWg8

Remo Williams's picture

Yes we can! (kick the can down the road)

James T. Kirk's picture

maybe  we can find some strange new world where no man has gone before, and get some outworld suckers to buy this crap 

Fazzie's picture

  If they did, they would set up an intergalatic monetary fund and the USA middle clas taxpayer would be funding bailouts of alien planets.

Oh regional Indian's picture

Hah! It probably exists, we just don't know it yet!

ORI

Raymond Reason's picture

Aye Cap'n.  Live long and prosper. 

Incubus's picture

Any reasonably intelligent species would wipe us out before we ever got the chance to mess up their civilizations. 

 

Ignorance does not imply innocence.

 

edited for less vulgarity, as I'm feeling pretty upbeat and sociable on this day.

DaveyJones's picture

"The only question is who will it sell it to?"

small school children. Just stay 1000 ft away from the school. Those sentence enhancements are a bitch

TruthInSunshine's picture
by James T. Kirk
on Sat, 07/09/2011 - 19:08
#1440360

maybe  we can find some strange new world where no man has gone before, and get some outworld suckers to buy this crap

 

This is the reason for what we have been told is the final shuttle mission. They have packed the shuttle with a quadtrillion in treasury notes and they are being delivered to planet Keynes, which has an extraterrestial population of organic beings known as Krugmanites.

 

zorba THE GREEK's picture

 I would buy some if the rate were high enough.

malikai's picture

I think 25% would attract me as a buyer.

FeralSerf's picture

If they were 25%, gold would be a much better investment.

There would be a reason for the 25%.

malikai's picture

I just went back to the period 1975 - 1982 with a gold and T-bill rate chart.

Wow, you're right. Stunningly so.

unununium's picture

High rates did not kill the ramp in gold for a while, but they did kill it eventually.

Folks when gold starts its moon ride, you must sell some on the way up.  Let's not be a bunch of oinkers now.

FeralSerf's picture

It's different this time.  Haven't you noticed?

malikai's picture

It is different this time. Money supply is up much higher, gold is up much less, and interest rates are just silly. So how much longer will it go on?

FEDbuster's picture

Zimbabwe had many 200%+ up days in it's stock market, we will have our day in the sun, too.  Get your DJA100K hats printed now.

unununium's picture

If I were an uberclass shot-caller, I would do a controlled experiment before pulling the trigger on the BIG swindle.

Maybe Zimbabwe was a petri dish.

Ham Wallet's picture

Some shithead from MSNBC was on Real Time w/ Bill Maher last night and said investors are piling through the windows of the White House to try and get their hands on US Treasurys.  lol. 

cartonero's picture

They're looking for the silverware

FeralSerf's picture

They need to check with the Clintons.

I Got Worms's picture

These two responses are why I read ZH.

thunderchief's picture

The best thing to do with US debt is make it only redeemable in the USA and to be used on infastructure projects like high speed rail, subways etc. Let the Chinese come in and build them with their dollars and then give them half ownership in these projects. If they say no then don't pay them shit.

No Bid's picture

I wish there was some reciprocal to "flag as junk" so that I didn't have to comment to tell you that I 100% agree with your post.

lizzy36's picture

Just an FYI, that shithead doesn't work for MSNBC, he works for US Treasury. And his name is Geithner. ;)

Fazzie's picture

 Technical distinction only.

Problem Is's picture

That's Jeethner... As in Wanker Timmay...