"It's Gone" - Why Foreign Demand For US Treasuries Has Disappeared

Tyler Durden's picture

Last week's TIC data confirmed something the Fed's Treasury custody account has indicated for the past several months: foreign demand for US government bonds has not only tumbled, but there has been aggressive selling.



So much so, in fact, that in the past 12 months foreign central banks have sold a gargantuan $335 billion in US Treasuries (and $242 billion when looking at all foreign transactions including private).


But how is this possible: after all the yield differential between US government bonds and the rest of the DM complex is approaching record wides.


It turns out that the answer lies in the ongoing blow out of the cross-currency basis, i.e., the implicit global dollar shortage, something we highlighted several months ago, and which has only gotten worse in the months since, following the spike in dollar hedging costs and short-term funding costs (see Libor).

The collapse in demand for US paper as a result of the blow out in swap spreads is the topic of this morning's FX Daily by Deutsche Bank's George Saravelos who notes in a note titled "It's Gone" that "a remarkable hunt for yield has taken place over the last few years. Foreigners have fled negative rates and flocked to US fixed income to take advantage of positive rates. Currency hedging these purchases has been a popular strategy: investors buy long-end bonds and use short-dated forwards to eliminate the FX risk."

However, apropos to the current basis spread environment, something significant has happened in recent months: buying 10-yr US treasuries is no longer profitable. It is not only Europeans or Japanese, there now isn’t any global fixed income investor that can make decent money by buying hedged USTs.

Even more remarkably, the reason behind this lack of return isn’t that long-end yields have compressed: the rate differential between the US and the rest of the world has stayed quite stable. Instead, it is diverging central bank policy (Fed hike vs cuts elsewhere) and the widening in cross-currency basis (which is the cost of hedging using a forward over and above that implied by covered interest rate parity; the drivers are regulatory tightening, differing investor liquidity and hedging preferences, as well as bank credit risk) that now makes it very costly for investors to hedge.

Deutsche Bank draws three conclusions from these simple observations.

  • First, it is hard to see the relentless foreign buying of hedged US fixed income continuing at the same pace. Unless other bond yields decline deep into negative territory (they are already zero), there may be limits to how much more UST yields can compress.
  • Second, the rise in forward costs is bullish USD. If investors want to pick up AAA yield, they will have to do so unhedged, which will generate demand for dollars. If they don’t want FX risk, investors will have to buy higher-yielding corporate bonds or other riskier US assets.
  • Finally, cross-currency basis and the US short-end may prove material drivers of global capital flows going forward. On the one hand, the widening in cross-currency basis is essentially a “tax” on hedging costs distorting global capital flows. On the other hand, a Fed tightening will make FX hedging even more expensive, counter-intuitively forcing investors to increase, rather than reduce, FX, credit or duration risk.

Keep an eye on the Fed's weekly custody holdings of Treasuries for the most current data if basis hedging is pushing even more foreigners out of the world's most liquid fixed income security.

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Neil Patrick Harris's picture

tl;dr Foreign central banks are selling the bonds because they're out of cash.

VinceFostersGhost's picture



Should we tell them the part where we don't have any gold anymore?

LawsofPhysics's picture

Do we? who the fuck really knows?  Schrodinger's gold bitchez...

asteroids's picture

"... full faith and credit..." One or both is now missing in the eye of the buyers. Obozo and the FED, has debauched things, kinda like "hope and change."

Kirk2NCC1701's picture

Quantum Gold, as alluded to by LoP.

Q: Where is it?  A: It depends.

You Only Live Twice's picture

That is partly true. Part of it is to defend their currencies.

But it is part of something else also. With sustained low Oil prices, less dollars are needed to purchase Oil and therefore less US debt. It is essentially leading to the collapse of the Petrodollar System which allowed the US to export debt. With low Oil continuing, US debt will continue to be sold.

buzzsaw99's picture

hedging is for pussies.

ZeroPoint's picture

This is why Birdie says we need trillions more in QE. It's to buy treasuries.


ATM's picture

It will be sold as being for the children.

Bananamerican's picture

yeah, the Children of the Corn...syrup

Kirk2NCC1701's picture

We're all Japanese, or "Going Japanese", I really think so.

1. The PTT keeps prices up, the Central Banks nationalize their respective Markets.

2. Then comes the Reset (tide goes out for all, not just the Banksters who caused it).

3. Privatization and a new super-cycle starts over. This time with a world currency -- initially the SDR.

JRobby's picture

Just part of the slow collapse. Here comes panic!

Citizen_x's picture

Wondering if China is selling
their US Treasuries ?

Allen_H's picture

Soon it will be at a tsunami rate of sale, nobody will want to touch anything with Amerikkkan currency attached to it.

Citizen_x's picture


It's backed by a "Good Faith"

What could go wrong ?

Uncertain T's picture

Nothing could go wrong everything is E Pluribus Awesome!

Chupacabra-322's picture

Well, the IMF will be adding China to the SDR come Oct 1. Logic would say they would be dumping US worthless fiat.

Wonder how much of that ransom money to Iran was paid in US Currency? Probably not much.

Vageling's picture

Actually none. They used European banks to get it in EUR and CHF.

KickIce's picture

Or here comes CNTL-P.

McCormick No. 9's picture

No-one buying Fed paper? Are the chickens-er dollars- coming home to roost?

Hannibal's picture

That could result in no more wars.

Allen_H's picture

They are currently trying extremely hard to get one going. But everybody is on to their game.

Last of the Middle Class's picture

If you print enough and keep on buying back the bad debt you can eventually have an economy built on just the per cent take the people handling the transactions. As far as I can tell that's the Feds master plan. Everyone else is just fucked.

LawsofPhysics's picture

By my calculations this is already over 40% of the American GDP.  Can't imagine what it is for China.

LawsofPhysics's picture

That's the "official" claim anyway....

I call Bullshit.

Arnold's picture

Algos kept busy on their coffee breaks.

 Early summer warnings of extreme volatility has reined the algos in a bit,

except for the manipulative skimming in Oil part.

Silverhog's picture

Adult diapers for all Jackson Hole attendees. Shit storm is just a few miles away. 

Carpe Tutti Bastardi's picture

Not being that knowledgeable in Global/US Financial Instruments
would it be safe to say that this is another nail in the coffin?
And if so..what size nail - a finishing nail, 10P or a railroad spike?

Arnold's picture

Every thing is a Carpet Tack.

Untill it isn't.

WSR's picture

It's a 3" long nail gun refill.

MilwaukeeMark's picture

Doesn't take a rocket scientist to figure this out. It's the same reason eventually we all stop loaning our shiftless brother in laws money. You know their squandering it, they're taking advantage of you and you'll never get a penny of it back.

CHX's picture

What happened with the 250b $ proceeds ? Who gobbled these treasuries up ?? 

LawsofPhysics's picture

Your pension?

No idea, but hardly matters at this point, moral hazard is a real motherfucker like that.

LawsofPhysics's picture

Hey, that's okay, it was always the goal of The Fed to own it all anyway!!!

PirateOfBaltimore's picture

LOL so let me make sure I'm understanding Bizarro World:


$12T in negatively yielding bonds, which buyers are flowing into, but 10yr treasuries at ~1.5% are unattractive?!


What.  The actual.  Fuck.

GunnerySgtHartman's picture

The central banks have succeeded in really screwing things up.  WTF indeed.

Arnold's picture

Skinny dipping in the sewage settling lagoon without a bottle of Purell.

You Only Live Twice's picture

The answer is the Petrodollar System. Sustained low Oil prices = less need for dollars and therefore US debt.

Atomizer's picture

We told you they're  funneling a mass money laundering enterprise. Nail their ass.

If you don't, the entire Constitutional Laws go out the window. Stop these cunts immediately. This is our country, your United States of America sovereign country. 

Based on financial data. They plan to bring down our country. It must fucking stop! Immediately! 

It's that serious. I don't want to say, told ya so. Once the German bank collapses, the hidden process begins without your consent. 

LawsofPhysics's picture

I never gave them my consent in the first place.  The outcome of such "let the majority eat cake" monetary experiments is already well documented, this time will be no different, just a much larger scale.

LawsofPhysics's picture

Okay, but wait just a minute. If the central banks around the world are selling U.S. debt, who the fuck is buying it?

LawsofPhysics's picture

For every seller there must be a buyer, can't see how it can be The Fed, everyone on the fucking planet is watching their balance sheet...


KickIce's picture

They're probably running multiple sets of books.  I imagine it's sent straight to London or any number of their NWO buddies that never disclose their true wealth to the public.

LawsofPhysics's picture

With what?  No increase or decrease in the assets on their balance sheet.  Front running the fraud by the Fed is the only game in town, how are they pulling this off, appreciate your insight...


there's a fucking trade in there somewhere...