Foreign Central Banks Furiously Dump US Treasuries: Record $47 Billion Sold In First Two Weeks Of 2016
It's not just stocks have a terrible start to the year, in fact the worst start in history: so is the amount of US Treasuries held in custody at the Fed, a direct proxy for the holdings of foreign central banks, reserve managers and sovereign wealth funds who park owned TSYs at the NY Fed for convenience.
According to the latest Fed data, after a drop of $12 billion in the first week of the year, another $34.5 billion in Treasuries held in custody was sold in the week ended January 13, bringing the total to just $2.962 trillion, below the previous recent low recorded in early November, and at levels not seen since April 2015.
Indicatively since April, total US Treasury holdings have increased by $570 billion, meanwhile not a single incremental dollar has ended up in the Fed's custody account.
As shown in the chart below, the drop recorded in the latest period is the single largest weekly drop recorded since China commenced liquidating its Treasury holdings in mid 2014.
Adding up the flows from the first two weeks of the year reveals the worst and most custody holdings "outflowing" start to the year in history.
The size of the liquidation promptly got the rate community's attention.
On Friday afternoon, MarketNews cited Louis Crandall, chief economist at Wrightson ICAP, who said "we have seen declines of more than $20 billion (in such Treasury custody holdings) on each of the first two weeks of this year. While accounts are volatile from week to week, that is certainly consistent with increasing intervention activity" from foreign central banks needing money to intervene either in the foreign exchange market or in the stock market, he said.
"There is no way of knowing" exactly what such central banks sold, he added. "But it could just as easily have been liquidation of coupon securities."
As MNI further writes, most observers saw China selling as behind the drop in Treasuries holdings at the Fed. "Circumstantially, that's the conclusion that people would jump to," said Crandall.
Some said it is not just China: Aaron Kohli, analyst at BMO Capital Markets, was less inclined to point to China. "It's definitely a drop, but keep in mind, every foreign central bank is in there," he said.
One other observer said that the decline "should be foreign central bank selling" as opposed to routine rolling of maturing securities. "Those are very chunky numbers. We did not even get such large sales back in August 2015 when we knew there was such selling" in Treasuries to get money to fund buying of China stocks, he said.
Others, however, disagree: "That kind of size could only be China," said the observer. But he added that at the margin, other Asian central banks could have been selling Treasuries to raise dollars for foreign exchange or stock market intervention.
One trader said China "must be selling, along with others. Look at the Hong Kong dollar, also down big. It is a game of musical chairs, and everyone is devaluing at once. The U.S. dollar strength is apparent."
* * *
One trader who has put all this together, and has linked it to the abnormal moves in the Treasury swap market is Ice Farm Capital's Michael Green.
As he puts it, "those who chose to seek protection in rates are only experiencing middling success due to the continued inversion of swap spreads which have traded to record highs."
Now this has been repeatedly noted in the press as irrational – why would US government bonds be trading at a risk premium to swap spreads which carry bank counterparty risk? I would suggest there is one very simple reason:
His conclusion is that "swap spreads appear to be blowing out because foreign holders of treasuries, namely China, are selling them at a record pace to defend their currencies. Currency levels are under attack in China, Saudi Arabia and now Hong Kong. The specter of 1997-1998 is again haunting the markets."
As Green frames it, "the key question is “How long can this go on for?” Consensus is clearly that China, in particular, has a deep pool of reserves with which to defend their currency; I am less convinced. Having seen some contrarian work on the subject, my belief is that China is a paper tiger – with very little reserves left to defend their currency. Perhaps as little as three months given their current burn rate."
If accurate (and Green's calculation excludes the hundreds of billions China may need to leave on its books if its NPL credit cycle finally hits as Kyle Bass is currently anticipating) then the coming months could see an unprecedented shock out of China which having spent hundreds of billions to slow a record capital outflow, has no choice but to let its currency finally float freely, leading to the biggest capital exodus in recorded history.
(6 votes)
»
- Login or register to post comments
- Printer-friendly version
- Send to friend
- advertisements -
Then China goes to the gold standard holding zero UST. Their banking system will be in place and can tell the world, we had no choice. Then the death of the dollar and Babylon.
30,000 tonnes worth --
I heard they were mining Uranus and had 1,000,000,000 tonnes---gold --wonderful gold---they have it all and I will have to sell my kids to get some cause everyone needs goooooold
i tink war will errupt well before gold comes into play, just tinking...
or just not-thinking
I think it is more like 40,000 tons.
So who's buying what's being sold?
US EXCHANGE STABILIZATION FUND set up in 1934 in the last year may of spent up to a trillion
So it's like a company buying back its own stock to keep up the share price?
No prizes for guessing where this will end.....
Belgium. They pay for them with chocolates.
Many people think it is the FED. Buying up their own debt. Question then is, what will they do with it then?
It goes into the digital vault where it quietly molders...as funny as any other digital entries in any books. Haven't you figured out yet that it's all an illusion ? When banks can "print" money by creating some entries in a ledger, what we think of as money has no meaning in the end.
Well everyone has always said one day in the future China would unload their treasurys. Looks like the future is now. Stealthily by making it look like they want to prop up their markets and currency
china is a lot of things ---one of them is BROKE ---and its gone---
Americans just never seem to get enough of being blind as bats.
They are not only worried about higher rates, but the strength of the dollar means they get moar of their own currency back now!
yes--great deal for them--then they can buy falling stoocks and loooose it ----and it's gone---
takes about i min to loose years worth of labor in the MARKET---lol
Common, China has way more than 3 months of reserves left to defend the Yuan. But at some point when they do run out, things will get interesting.
Having seen some contrarian work on the subject, my belief is that China is a paper tiger – with very little reserves left to defend their currency. Perhaps as little as three months given their current burn rate.
Three months, eh?? This is just more speculation (i.e. bullshit) by some hack. What about the (15,000 tonnes of) gold that China has in "reserve"??? They've been buying gold hand over fist since around 2009 or so . . . . no-one seems to be taking that into consideration.
Yup. They could start selling gold to defend the Yuan. Or land. Or shares in state-owned companies. Lots of stuff.
so--who's in the market for some cheap chinese junk?? Walmart shoppers i guess---
If China starts selling gold to prop up the yuan, then you know the end is not only near but has already been sleeping on your sofa for a week already.
First you get the massive release[panic $usd buying], then the deflationary tsunami follows shorty after.
I don´t quite understand why China shouldn´t let the Yuan float freely. Are there any really good arguments against that?
Yes, more than 1.357 billion
nidaar:
"Yes, more than 1.357 billion"
My comments:
Are you referring to the number of Chinese citizens?!
the goal is to devalue in an orderly fashion and not suffer a kneejerk flash crash. they will depeg when the market finds the natural rate for the yuan within the current structure.
besnook:
"the goal is to devalue in an orderly fashion and not suffer a kneejerk flash crash. they will depeg when the market finds the natural rate for the yuan within the current structure."
My comments:
Sounds like an excuse rather than a good argument.
The issue is that Chinese do not necessarily accept negative effects from floating. Suddenly you lose money without having done anything detrimental. Plus there could be currency manipulators like Soros. With such high population numbers as the Chinese have, disgruntled people can easily break down law and order. And that's what the Chinese want to prevent, maroding mobs by the hundreds of millions. The Chinese are more savers than spenders and their money matters to them. They are not like Americans, shrug their shoulders and say 'I can still be rich tomorrow'.
Apart from the Chinese aspect, many countries need their money now. Having it lent out does not help their populations. The $ has also appreciated and cashing in now is advantageous.
uhland62:
"The issue is that Chinese do not necessarily accept negative effects from floating. Suddenly you lose money without having done anything detrimental. Plus there could be currency manipulators like Soros. With such high population numbers as the Chinese have, disgruntled people can easily break down law and order. And that's what the Chinese want to prevent, maroding mobs by the hundreds of millions. The Chinese are more savers than spenders and their money matters to them. They are not like Americans, shrug their shoulders and say 'I can still be rich tomorrow'.
Apart from the Chinese aspect, many countries need their money now. Having it lent out does not help their populations. The $ has also appreciated and cashing in now is advantageous."
My comments:
Consumers, working-class people and middle-class people are not affected that much if the exchange rate fluctuates for their currency, provided that we are talking about a country with a huge domestic market like China. For big countries with little foreign debt a fluctuating exchange rate is not a problem.
yeah, AMericans.
Americans, you know what you have to do. Put down the bibles, put down the mirrors, the pointing fingers and demand justice for 911. It's all you got but it's enough. Redeem yourselves for Christ's sake. Just DO it.
https://www.youtube.com/watch?v=W_r62RuHR9M - 3 min clip comparing explosions, debris field expansion
Published on Jan 17, 20169/11 World Trade Center Special Atomic Demolition Munition Ground ZERO Tactical Nuclear Weapon Sept 11, 2001 WTC Demolition (05:00) W-54 is small Compact implosion-type Atomic Landmine or so-called "Backpack Nuke Suitcase Nuke, Atomic Landmines. Yields can be set from 10 Tons to 1 Kiloton .
Angry mobs of people, the one child only policy has created well groomed monsters.
http://www.dailymail.co.uk/travel/travel_news/article-3178319/Cabin-crew... Cabin crew hospitalized by after attack by 6 Chinese tourists.
https://www.youtube.com/watch?v=SaD0PZ_ptWY Angry Chinese airline passengers
Oops, one more! https://www.youtube.com/watch?v=N4Os5QKRmuw
These comments are painful
China has reserves for this reason. To spend them.
By selling they are spending them remember.
This is a big deal sort of. It's not the end of the dollar or the great bond bubble.
But it's significant how Chineese authorities are dealing with their economy.
Saudis spent reserves to wait out oil but now they are cutting back on welfare programs. China will adjust another way too since it's a different scenario. This is why you have reserves.
If I was China I would spend my USD on investing in the real economy. Non financial. Not for stocks. Not for bank reserves. But projects for the public and country.
I feel the U.S. Should do the same as well. Congress and president need to unleash a spending bill to pick up where private sector still has slack. Create demand in things we need and have capacity to provide. Infrastructure of energy, transportation, research, education. Screw this military tank building waste. Lets build a particle collider 5x bigger than the LHC!
And then use the massive tunneling to move fema troops around unnoticed.
in a perfect world your idea is great--but in a world of rake and bribe and payoff and blackmail the money only goes so far---not nearly enough money to satisfy greed imho
they have blew their wad. empty everywhere. zero cash flow. no plan for income streams.
now they pay for their misalocations or forgive the debt(owed to whom-ha, themselves), but irregardless they loose their illgotten gains due to the peg. just wish the usa had dealt with the intellecual property lose and the millions of jobs lost to this huge misallocation. but that is our rotting egg called "the great merger of corp and state with corp running the show- opposite of china...
Yeah, so that describes the US perfectly. What about China lol.
@whiterabbit "If I was China I would spend my USD on investing in the real economy. Non financial. Not for stocks. Not for bank reserves. But projects for the public and country."
Huh ? Where have you been the last 15 years ? Ever hear of ghost cities, roads to nowhere, high speed trains to nowhere, overcapacity in every real industry you can think of, stockpiles of ore, copper, metals, rare earths, etc etc etc. They HAVE already invested in their local economies - where the fuck do you think US factories, smelters etc all went ???
At this point the ONLY thing the Chinese haven't invested in is pollution control and cleaning up their environment.
What you and many others don't get is that demand for goods, real goods, has been so high the last 5 years because of central bank money printing and financial games on the real economy. The WORLD is at overcapacity.
i have the contrarian contrarian view. i think china is playing a game no one but china knows the rules to. i think they are doing this devaluation on purpose for one of two reasons. both are aimed at the dollar. china has local currency swap agreements with all of its major trading partners including japan. because of the dollar peg the yuan is much stronger than all of its partners' currencies. when your currency is worth a lot more than your partners, you buy stuff in your partners' country because it is cheaper. there are dollars being returned to the usa, not buying stuff in other countries, although china may be helping out with some of their immediate dollar needs. spreading yuan around through currency swaps internationalizes the yuan making conversions much easier. i think one goal of this strategy is the simplest plan. devalue the yuan vis avis the dollar to make exports to the usa cheaper. the other purpose is to accellerate the dedollarization of the dollar, causing the dollar to devalue to take the pressure off the dollar based commodity market. once the new brics swift system is in place(very,very soon), currency convertability amongst member countries will be able to avoid the dollar all together. china no longer, then, needs trillions of dollars in reserve.
the least of china's concerns is with the dollar imho----it's the US centric mentality that pictures the PBOC caring about the dollar---- a lot of bodies in china expecting a lot from the "party". The party croneys cleaning out moms stock stash and the families RE holdings is a problem coming home to roost. The party is worried about party heads and that they may roll.
the gooooold is there to pay off the military so the party can flee the country---just guessing.
Chinese civilization goes back thousands of years. Unless nuclear weapons are used, these disputes are merely blips in world history.
So, if I moved my funds in 401k out of stocks and into a T rowe Price US Treasury Money account, am I doomed?
You're kidding, right?
Fidelity and Vanguard have had all their account holders move all their commercial money market accounts into US Treasury product-based money markets. The Dodd Frank and other regulations now regarding money market funds make these fund immune from new gating and break the buck problems. I think the new federal-ific funds can flucuate in NAV but they are not subject to being "shut-in" the way commercial funds can be.
Meh a few billions. When they sell hundreds of billions in a month, call me back
Uh, meh yourself. That was 50 Billion in two weeks. Since you seem to have dropped out of math class, that come to 100 Billion a month, or, 1.2 Trillion a year. In other words the Fed is being forced more and more to buy nothing except US government paper. Should be interesting as the amounts in the Brussels bank swells. Can you say 'it's over'? they officially run out of runway in May 2016.
So if these Treasuries are not on the Fed books then where are they now, Bahamas? Cayman Islands? Some country that doesn't have oil?
Brussels
When all the capital flees China, where will it go?