China Continues To Boycott Treasurys As Japan Prepares To Become Largest Foreign Holder Of US Paper

Tyler Durden's picture

In all the confusion over Pandit's resignation, the monthly Treasury International Capital data came out which showed a big jump in foreign purchases of Long-Term US Assets, with the total foreign LT purchases soaring to $78.5 billion in September, the biggest inflow since January's $102.6 billion. There were inflows in all categories, with Agencies and Corporate bonds benefiting the most, to the tune of $18.6 and $10.8 billion, respectively. Purchases of LT TSYs were in line with previous months at $42.9 billion. That said, hardly anything to write home about considering the far greater inflows of prior years.

Where there were notable developments was in the composition of buyers of US paper, which showed that for yet another month, there has been virtually no buying interest in US paper by the biggest non-Fed holder: China, whose total TSY holdings were $1,154 billion, down $12 billion since the beginning of the year, and down a whopping $125 billion from a year ago. Ironically that other massively indebted country, Japan, which has Y1 quadrillion in its own public debt to deal with, for a debt/GDP ratio will above 200%, continues to load up on US paper, as the biggest paper ponzi scheme continues going ever higher and nothing possibly can get in the way. In fact, as the chart below shows, the difference between total Chinese and Japanese holdings has declined to a record low $32 billion, and will likely see Japan surpass China as the biggest holder of US paper very soon. For some reasons on why China is not buying US paper, see here.

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dolph9's picture

Is Japan committing ritual suicide?

francis_sawyer's picture

Somebody has to print money to buy our debt... Otherwise it wouldn't make any sense...

GetZeeGold's picture



Clearly we need make our paper rainbow they do in Europe.


MillionDollarBonus_'s picture

This is a smart investment by the Japanese. US treasuries are in a clear uptrend, and there's plenty more upside from here. I anticipate negative yields on US treasuries in short order.. This will be the biggest wealth transfer in history and I want as many people to be part of it as possible, which is why my goal is to educate zerohedgers on the benefits of frequently compounded cashflows and risk free interest rates.

JonNadler's picture

my brother, can you also educate them about the evil of owning gold?

After all gold is backed by nothing

LawsofPhysics's picture

Tell us MDB, how has the purchasing power of physical gold held up again?  Bah ha ha ha ha ha!!!

Stick to the satarical trolling idiot.

EatYourCornTakeyourPill's picture

Simmer down brothers, our day will come. Long USD, you fools. We will buy our gold for pennies shortly.

matrix2012's picture

the backup of the barbarous relic indeed lies beyond our system... need to wait another star pops up :D

Snidley Whipsnae's picture

You consider US paper with negative yield a good deal?

Then 1983 US paper yielding 13% must be a moon shot?

BTW... 'risk free' doesn't exist in any paper assets.

WhiteNight123129's picture

There are no risk free assets, the risk depends on the price. Cheap = less risky, expensive more risky, daily volatilty <> risk, daily volatility = white noise.


crusty curmudgeon's picture

The only thing better than selling gold (so I's not like I would have any of that barbarous relic) is buying FB stock and REITs.

Everybodys All American's picture

Have you ever considered that some people might believe you're serious? For those people you are doing tremendous harm if they take your advice and you really need to stop and consider that outcome.

EatYourCornTakeyourPill's picture

the people you're referring to who would ignore the entire comments section of people talking smack about fiat paper and take one guys advice who preaches the evil of gold and the strength of UST in the long term. Yeah they deserve what's coming to them. Keep it up MDB, Jon Adler made me Lol out of my chair at work today. Awesome. Love you guys.

TheCanadianAustrian's picture

So what you're saying is if people are stupid enough to believe he's serious, they might lose money?

Stupid people? Lose money?

Has this ever not been the natural order of things?

WhiteNight123129's picture

There are already negative in real terms. As long as the rates are negative in real terms, regardless of the prices, and regardless of the level of inflation you have hoarding. IF you want dishoarding you need real positive yields. If the Fed was to do that now, 20% of the US population would starve.

The Gold trade is both a printing trade (moving all assets up) and a negative real rate trade (hoarding) at this stage. For now equities and bonds move up along with commodities. But for different reasons. The financial assets move up because nominal rates have been wacked by expansion of medium. Commodities and Gold move up for a different reason, they move up because at the same time that nominal rates are down (financial asset bullish) real interest are negative.


At some point the nominal rates will increase (in order to prevent the yield to get too negative in real terms), while the real rates will keep being negative. This is where the long commodities short financial assets will be the most interesting. Commodities keep moving up when rates are negative even if nominally those are high (1970s).

High positive rates (2009), act as a lid on prices, and of course the Fed fought that by flooding the system with money which represses the rates, the rest is history.

So for those wondering why the commodities and the financial assets still move higher together, it is because we had at the same time nominla rates down and negative rates.

When the Fed stop printing, a lot of Gold bugs will be baffled because too many of us think the Fed will print to infinity. Re-acquire the baffle sell-off because the rates will be negative for years to come even if the nominal rates move slowly to the moon (finanical asset bearish), they will be behind inflation as long as nominal GDP to debt is low.

When nominal GDP to debt is high again, the Fed can re-engineer a new high real rate change of direction, then circulation start to be flowing back into financial assets and we start a new leveraging cycle (it will take years to get there). Do not hold Gold at that time (years away anyway).


MeelionDollerBogus's picture

LOL - SMRT like rock

In case you hadn't noticed the cashflows are near-zero or effectively negative which is pointless. I'm not a giant fund pledging re-hypothecated Treasuries for leverage across several outfits all owned together but not publicly or clearly stated as such, hence one giant leveraged trading keiretsu.

Treasuries are risk-FULL, a guaranteed loss.

LongBalls's picture

As Japan goes so goes the U.S?!?!?!? *Sigh*

JamesBond's picture

japan can not afford for china to have more financial clout with america than they do.  



Half_A_Billion_Hollow_Points's picture

interesting observation... when Japan asks for the USA's soldiers lives, US will have to deliver.  


Long bodybags, long US flagmakers.

matrix2012's picture

Nope dolph9!  I won't call it a kind of harakiri or kamikaze.

Japan is only paying out one of the various protection fees by Yakuza.

ilovefreedom's picture

Just attempting to counter balance (semi-stabilize) their own currency's massive devaluation.

i.e., attempting to hide behind the prettiest horse at the glue factory (the US), if they don't hide behind the USD TSY which is crappy, but still more stable than the Yen it would aceclerate the demise of the Yen.

These are stall tactics, but what isn't nowadays.

Mainstream media headlines: YAY!!! We are becoming less indebted to China!

Me: China doesn't want to buy our crap because it is not competitive, this is NOT a good thing. Japan buys our of survival, China buys out of choice. That means there are better choices existing in the global market.


CPL's picture

How can they be buying anything!!  They've been broke for 20 years.


Don't they have a nuclear plant to contain?

ATM's picture

They will paper over their indebtedness just like they will paper over those nuclear reactors.

CPL's picture

It's next to the open ostrich field where thousands of heads are buried in the dirt.


Man Japan has become such a shit hole.

Bastiat's picture

A people for whom loyalty and consensus are central social values -- betrayed by their leadership. 


fuu's picture

It turns out that only a small amount of the corium in reactor #1 escaped out the top, the rest just melted through the floor into the mudrock. It's contained like sub-prime.


flaunt's picture

quid pro quo?  "you buy our crappy paper and we'll support your takeover of Senkaku Islands"


francis_sawyer's picture

you'll tell me when those lambs stop screaming won't you Clarisse?

LawsofPhysics's picture

Bankrupt countries "bailing out" other bankrupt countries? -  FAIL.


Just for fun could someone put up a 30 year chart of the NIKKEI?

RSloane's picture

Why not? Its all the rage in the EU.

Anne Ominous's picture

Another case of the blind leading the fucking stupid.

LongSoupLine's picture

All that matters is that this totally fucking retard "market" is up big.  unfucking real.

bigdumbnugly's picture

well i guess this means the US will now consider the proper pronounciation of those islands 'Senkaku' and not 'Diaoyu' after all.

Dr. Engali's picture

So the rats jump the ship at shiti for no apparent reason and the stock is up. What a crazy fucking world. 

Shizzmoney's picture

The Fed Reserve and the Bank of Japan are connected at the hip.

They go down together....I wonder what the common denominator is (Benny Boy)?

Sleepless Knight's picture

They'll keep this shit up for years. Look how long Greece has been on the brink. We have another 100% debt to GDP to go just to get even with Japan and they're still functioning. They will ride this bitch until WW3.

ziggy59's picture

Bullish for Paper Pulp!

Inthemix96's picture

And I was allways led to believe that the Japanese were smart?

Shows how much I know then doesnt it?  Stupid fuckers will go down the drain before the US of A.


Dr. Engali's picture

Japan has always been a vassal state of the U.S. they will do what we tell them to do...even if it leads them down the road to hell.

Snidley Whipsnae's picture

Don't believe everything you hear... or read... including TIC reports.

It is not easy to determine the 'end user' or buyer of US paper.

For instance:

It has been suggested by many that since China is coming under increasing pressure from it's own military and it's people to avoid US paper that it might be buying through other soverigns for it's own soverign wealth fund.

Urban Redneck's picture

I laughed at the second quoted line (bolded) from Mish, it brilliantly exposes the inexperience and naiveté of the author and the underlying truth simultaneously.

"Remember when China tried to buy Unocal, a petroleum producer, for $18.4 billion? The state department nixed the idea as a security concern. The same thing happened when Dubai tried to buy a US port.

Eventually those dollars will come home, they have to, as a function of math. In the meantime, passing the buck like a hot potato does not work"

The Chinese pass out US Treasuries like they are used used toilet paper.  I'd equate it to the Chinese Citizenism take on rehypothecation.  Collateral chains behind industrial finance transactions might have US paper being pledged at the major western commercial banks, at the end of the day China walks away with both equity and a higher USD interest rate than they would have had if they simply sat on the US paper.

16 March 2006 & 2 August 2005 will be important dates to look back at once the debt bomb drops and people are looking around trying to figure out how they wound up holding the hot potatos.


Half_A_Billion_Hollow_Points's picture

Look up China Investment Corp.  They will buy Apple, Google, IBM, whatever else that has any value larger than toilet fiats.

Urban Redneck's picture

I did an economic analysis of Chinese dollar hedging (dumping) in the spring of 2009, when it was a very unpopular notion due to the debt euphoria that reigned in the flight to "quality" that coincided with S&P666. The analysis looked at a number of issues: the new Yuan settlement trial, the Christmas "surprise", new bilateral swap lines simultaneously and clandestinely negotiated, the Chinese stimulus plan funding structure, Chinese FI reserve requirements (and their USD component), the withdrawal/repatriation of Chinese deposits held is US FIs, Chinese (Public) Accounting Treament of US Treasuries owned by Chinese (State-owned) banks, PBOC Announcement 3 of 2009, the rise of the domestic (Chinese) dollar denominated bond market, the stockpiling of physical commodities by the SRB and less "official" entities, the SWF and development fund preference for convertible debt deals, the signing of (future) off-take agreements denominated in USD...

The upshot is that neither the physical gold market nor global equity market is large enough to absorb the more than 3.5 trillion in Chinese "paper/debt/money" reserves. So the Chinese were (and are) engaging in some creative capitalism, and one the methods is to align current USD "assets" to future USD liabilities.

The (re)hypothcation twist adds a current cashflow to the hedge/exit strategy.

Ghordius's picture

I'm not sure I understand the two phrases after the last comma, pls expand

Urban Redneck's picture

from a cash management perspective-

China (and its SWF, State-Owned Bank, and "other" subsidiaries) have a combined huge pile of medium and long-term US debt with a known maturity schedule - x billion in 2015, y billion in 2016, z billion in 2017, etc. (in addition to the billions of short term 0% stuff that they seem content to regularly roll)

In the interim, there is price risk associated with the offloading debt holdings before maturity (which hasn't been a factor so far, thanks to Uncle Ben)

However, at maturity there is a purchasing power risk that the USD received will be substantially diminished (more than historical USD devaluation/inflation)

Both of these risks can mitigated today if the holder of the maturing US debt enters into an agreement to purchase a something for a fixed amount of USD at the time of maturity.  The largest convertible debt example at the time was the 19.5B Rio Tinto deal (which also bypassed the political headaches associated with the Unocal rejection, and the concurrent clusterfuck takeover attempt of OZ Minerals).  On the commodities side SRB had just authorized an increase in the national Aluminum stockpile of 1M tons, of which only 1/3 of which could be accounted for with physical deliveries, as opposed to futures contracts.  There were also similar programs for other commodities (copper being the MSM news cycle darling).  Because of the opacity and many balance sheets involved its impossible to match everything, but the scope and scale of future Chinese commitments to buy stuff in USD offsets an otherwise huge risk in the current debt portfolio.  In addition, the off-take agreements, while introducing commodity pricing risk, give them a guaranteed supply of raw materials and a locked in buyer for their USD.



Urban Redneck's picture

The second part is more recent and murky since banks don't like to disclose the inner-workings of their balance sheets or their hypothecation activities, so I am relying on deals that I have seen the paperwork on, and the trend they appear to present. There is a recurring theme- ABC Company of China wants to "invest" USD100M or so, for an overseas project (Asia, Africa, South America, etc.) and the subsequent due diligence raises questions about why and how ABC Company of China even has USD 100M to invest in the first place. Another peculiar trend within this subset of transactions is the Chinese desire for the involvement of a primary (or huge foreign) dealer of US Treasuries to act as an intermediary bank (irrespective of their experience in either the Chinese market or the target market). The traditional vehicles - direct loans, structured finance, mezzanine finance, or loan guarantees are on the table, and every deal is different. I am still working out the details of what I know, versus what I think, coupled with might be privileged information, but 100M here 1B there, sooner or later you are talking about real money and balance sheet exposure, even for a centrally planned leviathan. The PBOC is forcibly creating demand for loans (even while tinkering reserve requirements and capital rules), when these centrally planned loans are purely domestic, it is a safe assumption that they are CNY denominated, but that is not a safe assumption if the loan effectively an FDI conduit.

Ghordius's picture

excellent stuff, Urban Redneck, I'll really have to mull over it. thanks

this does fit to the experience of a few friends of mine that work with small/medium Chinese entrepreneurs who get huge cheap credits to buy their storage spaces full of metals like copper, and that we suspect are also involved in the futures of those metals on a state-organized level. I'm not sure if this is not an open secret, by now.

I understand the Chinese want to stop buying USTs by 2016, though this plan might change - the new 10y-batch of political/operational elite is being selected and will be presented soon