China Dumps Treasuries: Foreign Central Banks Liquidate A Record $403 Billion In US Paper

Tyler Durden's picture

One month ago, when we last looked at the Fed's update of Treasuries held in custody, we noted something troubling: the number had continued to drop sharply, declining by another $14 billion in one week, and pushing the total amount of custodial paper to $2.788 trillion, the lowest since 2012. One month later, we refresh this chart and find that in last week's update, there is finally some good news: foreign central banks finally bought some US paper held in the Fed's custody account, which following months of liquidation, rose over the past two weeks by $23 billion, the biggest two-week advance since November of 2016, pushing the total amount of custodial paper to $2.816 trillion, the highest since early October.

That was the good news, and we use the term loosely in as much as the custody account can be used as a proxy of foreign buying, which according to most rates watchers, it can.

The bad news came out with the release of latest monthly Treasury International Capital data for the month of October, which showed that the troubling trend presented one month ago, has accelerated to an unprecedented degree.

Recall that in mid-November, we reported that in the latest 12 months we observed a record $375 billion in Treasury selling by foreign central banks in the period August 2015-September 2016, something unprecedented in size.

Fast forward to today when in the latest monthly update for the month of October, we find that what until a month ago was "merely" a record $375 billion in offshore central bank sales in the LTM period ending  September 30 has, one month later, risen to a new all time high $403 billion in Treasuries sold in the past 12 months.

As the chart below shows, there has never been such an aggressive selling of US Treasuries over a 12 month period in history.

The biggest seller, and keep in mind that TIC data is on a market-price adjusted basis, was once again was China, which in October "sold" a record $41 billion in US paper (the actual underlying number while different, as this particular series is adjusted for Mark to Market variations, will be similar), and a massive $125 billion in the last 4 months, bringing its total Treasury holdings to just $1.116 trillion, the lowest amount of US paper held by Beijing since 2010. In the process, China has now been overtaken by Japan for the top US creditor position in terms of total holdings with $1.132 trillion, for just the second time.

It wasn't just China: Belgium, which has long been rumored to be the venue where China's keeps its "secret" offshore Treasury holdings couretsy of Euroclear, also dumped its TSY holdings, and in October its stated holdings (which again have to be adjusted for MTM), tumbled from $143Bn to $117Bn, the lowest since the summer of 2015.

Furthermore, as we have shown previously, when superimposing China and Belgium's holdings together, these tend to allign almost perfectly with the monthly change in Chinese reserves, which as reported before, have been declining sharply in recent months as a result of China's aggressive attempts to prevent a sharp devaluation of the Yuan. This can be seen on the chart below, and confirms that at least when it comes to China, the reason for the selling of Treasurys has been due to reserve liquidation.

As we pointed out one month ago, what has become increasingly obvious is that both foreign central banks, sovereign wealth funds, reserve managers, and virtually every other official institution in possession of US paper, is liquidating their holdings at a disturbing pace, something which in light of the recent surge in yields to over 2 year highs, appears to have been a prudent move.

In some cases, like China, this is to offset devaluation pressure; in others such as Saudi Arabia and other petroleum exporting nations, it is to provide the funds needed to offset the drop in the petrodollar, and to backstop the country's soaring budget deficit. In all cases, it may suggest concerns about a spike in future debt issuance by the US, especially now under the pro-fiscal stimulus Trump administration.

So who are they selling to? The answer, at least until August, was private demand, in other words just like in the stock market the retail investor is the final bagholder, so when it comes to US Treasuries, "private investors" both foreign and domestic are soaking up hundreds of billions in central bank holdings. As we said two months ago when we observed this great rotation in Treasuries out of official holders into private hands, "we wonder if they would [keep buying] knowing who is selling to them." Well, last month this changed, and after private investors had been happily snapping up bonds for 4 straight months, in September "other foreign investors" sold a whopping $31 billion, bringing the total outflow between public and private foreign holdings to $76.6 billion, the second highest number on record. In October, while foreign official entities sold another $45 billion, at least the pace of selling by private entities moderated somewhat, to "only" $18.3 billion.

Meanwhile, while just four months ago yields had tumbled to near all time lows, suddenly the picture is inverted, and long-yields are surging on concerns that not only will the ECB and the BOJ soon taper their purchases of the long end, but that Donald Trump is about to unleash a $1 trillion debt tsunami at a time when the Fed will not be available to monetize it, now that the Fed is again hiking rates.

While it is unclear under what conditions foreign buyers may come back - after all TSY rates have already jumped high enough to where US paper should be more than attractive to foreign official institutions - one thing is clear: as of this moment the selling strike not only continues but is accelerating, and should the foreign liquidation of Treasuries fail to slow, Yellen will soon have to plan how to not only abort the current rate experiment which continues to pressure yields higher around the globe, but to start thinking how to launch QE4 instead.

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NugginFuts's picture

So this is bullish, right? DOW 30k by year end now?

What could go wrong?

BUY BUY BUY BUY BUY

Pinto Currency's picture

LIBOR has been tightening global credit since 2014 and slowing global trade.

As trade slows, EM currencies (including Yuan) fall causing USD demand to pay back local USD denominated debt as soon possible. CB's then sell their treasuries to get those dollars to meet local demand.

http://www.safehaven.com/article/43077/president-trumps-immediate-emergency

Holy hand grenade of Antioch's picture
Holy hand grenade of Antioch (not verified) rccalhoun Dec 15, 2016 5:41 PM

All your joobux are belong to YOU!

Stuck on Zero's picture

What exactly are people trading the treasuries for? Cash? Bank notes? Stocks? Foreign currencies? Acquisitions?

eatthebanksters's picture

Market liquidity no onger seems to be an issue...

Save_America1st's picture

as always, BTFD, bitchez. 

Stack the phyzz Ag in 20 ounce chunks...the scumbags might monkey hammer it lower, so don't go all in.  Buy little by little on the way down and a little more once it comes back up.

Watch the GSR (gold to silver price ratio).  That's important, bitchez. 

And when that ratio comes down to under 30:1 start trading a little phyzz Ag for phyzz Au

Hal n back's picture

Gold or their local currency

roddy6667's picture

China is buying vast amounts of gold and also strategic metals used in manufacturing, like copper, beryllium, titanium, etc. When inflation returns with a vengeance, they will skyrocket in buying power while the dollar tanks.

El Dorado's picture

Or the traders will perceive inflation as a sign that the FED will continue to tighten further and bid the dollar higher.

Bay of Pigs's picture

Pardon my ignorance, but how the fuck is this bullish for the USD?

willwork4food's picture

Similar to what Pinto posted earlier, EM's have outstanding USD debt they must pay back with USD's. When Yellen raises rates their interest and monthly/quarterly rates rise too which means they need more USDs to pay back the loans. Demand for USD's is bullish for the USD, doesn't help someone that wants to sell widgets (payable in USD) to China or another EM.

Mr. Magoo's picture

Nothing to see here move along. China dumping treasuries is not any reason to be alarmed or worried the Fed will continue to buy buy buy as they always have until the Zimbabwe or Venezuela hyperinflation will kick in. That could never happen here Right????

NOT!!!

kliguy38's picture

sumbody is gettin' ready for a reset

Make_Mine_A_Double's picture

Getting ready for push come to shove in South China Sea.

sinbad2's picture

It was Hillary's job to push the button, so they might speed things up a bit now.

MFL5591's picture

So who is buying all the paper they are printing?  Of course, the answer is that the Federal Reserve and the Treasury have ben lying to the American public, all the paper is being held internally because we are no longer a good credit risk!

new game's picture

maybe, but remeber other cb s are printing to buy. but not fast enuf to soak up the flood.

safe to say the buyer of last resort. da fed. dialing bowl cut for moar info. or checking

the balance sheet, crap, lies, lies, no decernable info present...

hyperspd7's picture

We haven't been a good credit risk for long time. We're like a destitute family with 7 kids, no job; We have 300k in credit card debt, are 5 months behind on the mortgage and we are asking for a loan for a new Cadillac. Pretty sad, that's the best debtor situation around in terms of nations.

Crisismode's picture

$403 billion is chump change.

 

Pissant nothing money.

 

Talk to us when REAL money is changing hands.

 

Until then, fuck off.

 

 

Hal n back's picture

Senator Ev Dirksen, in the 60's:

"A billion here and a billion there, pretty soon it adds up to real money"

El Vaquero's picture

That's over 10% of foreign held USTs.  It's kind of a big deal.  

Tall Tom's picture

 

 

 

 

That we know about? What about those stealth Treasuries which we are not supposed to know about?

 

But the trend is not a sneeze to be dismissed. You are correct about that.

 

The sell off will increase as the current bonds with low yields will be sold off at a discount for bonds that have higher yields. That would be the smarter long term move.

 

Get ready for more of this.

 

.

Lynx Dogood's picture

It is for the dollar. When you as a country can make loans or debt agreements in the euro, yaun or yen, call me. Will not happen for a while. Even China is stuck with the Dollar as it's reserve as there is not enough yuan of actual value in international markets. As well no government can offer a loan or bond in yuan, yen or euro. Those countries would never allow it. Don't get sucked in to the media smoke and mirrors.

Mr. Pain's picture

And gold continues on the way down the tubes.... Go figure!

Kirk2NCC1701's picture

PM will continue to go down as long as you and in own it.

The week that I sell my last PM ("Store of Value"), is the day it goes up again.

Murphy's Laws.

froze25's picture

What was the last recent low in silver like 11.50 an ounce?

 

HRH Feant's picture
HRH Feant (not verified) froze25 Dec 15, 2016 6:06 PM

I remember buying silver for $5 an ounce. Would it go lower than that? I doubt it.

Tall Tom's picture

 

 

 

 

In 1996, 2001, and 2002 Silver was trading in the low $4.20 to $4.50 ranges.

 

I was paying five cents per gram for Sterling Silver at Swap Meets and biying lots of it.

peddling-fiction's picture

Hi Tom, how is your health?

I am still in Bolivia, in La Paz.

Tall Tom's picture

 

 

 

 

Still here in wonderful Lakeside, CA, USA.

 

I am alright. Hope things are going well with you.

 

You are approaching the Summer months right now? Must be nice and warm. 

 

Best wishes. Pray for us for Monday's Electoral College vote. A nullification might bring us to the brink of Civil War may the Good Lord forbid.

 

La Paz is a good place to be.

 

(The problem is the total lack of understanding that the public has as they was never intended to elect the President according to the Constitution. But everyone on "both sides" feels entitled to have their vote counted. They believe in DEMOCRACY as they are DEMOCRAts. They do not understand that the United States is a REPRESENTATIVE REPUBLIC as true REPUBLICans do. Too many RINOs here. The ENTITLEMENT Mentality is a curse. And when their expectations are failed some will turn to violence. Thomas Jefferson was correct. A democracy IS the most abhorrent form of Government.)

 

Just my concern as I know that it is in God's hands.

 

To Liberty and Truth.

peddling-fiction's picture

Hi Tom, I am good. Great to know that you are ok.

Yes, summer is here but I live at 12,800 feet so, well, you know the physics.

Yes, I have had lots of concerns for the States. My prayers are with the few and the righteous.

Remember, things are they way they should. No fear.

So few understand the dangerous times we live in.

I only seek the truth Tom.

Tall Tom's picture

 

 

 

That is a high elevation. In fact a little over 12,000 feet is the highest elevation to which I have ever climbed. The air is thin and the atmosphere is rarified. I noticed a striking difference in color intensities. (Perhaps I was stoned from anoxia???) (Mt Agassiz, San Francisco Peaks, just North of Flagstaff, AZ) 

 

Must be nice about now. Must be beautiful.

peddling-fiction's picture

Interesting perspective Tom. I get you.

Been struggling just to function properly for some time.

Now I am starting to function properly, and if I were to go down in altitude, I will grow massively stronger in all respects.

I have already lived this down in Chile.

Used to live up in the mountains in the Central Valley, and every time I climbed down, I noticed the difference with the lower valley folks.

 

 

Tall Tom's picture

 

 

 

 

I like it when people believe that they can change the facts by a vote...by consensus. They are so deluded and Mentally Ill.

 

Thanks for the laugh.

 

http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx

Hal n back's picture

tell me--how much of the US population is aware, or cares, that US interest bearing debt is increasing annually by well ofover 1 trillion.

Then how many know or care or understand that China , Saudis and Belgium and som eothers are selling treasuries

The media cannot report this. It would make Obama look bad.

Yes We Can. But Lets Not.'s picture

I don't think the average Joe knows that Obama in his 8 lost years increased the Federal debt by $30,000.00 per average Joe, i.e. $150,000.00 per family of five (all the while raking in record Federal tax collections).  With nothing to show for it.  And with rates and thuse debt service load set to increase.

peddling-fiction's picture

There will be some bodies to show for this treason.

tmosley's picture

The spot price could easily go to zero.

The premiums will go to infinite.

IE decoupling.

Things are going to accelerate next year. Hope everyone is ready.

SubjectivObject's picture

Sell now please.

Your name will be remembered forev... oh wait.

Yog Soggoth's picture

Let's look at fairly recent history to decipher the future. If everyone had bought AG at 11, then waited to 20, sold, they would have kept in the game and made a few bucks. That was really not that long ago, so it certainly is not bearish. I am looking at current prices as buy time. China, what do they know anyways? Emerging country that they are. Surely the USD will skyrocket into outer space forever, leaving the entire world in it's dust.

dogmete's picture

Why would you sell it?  

Raffie's picture

Just to instill doubt to the weak mined is all theyu are doing.

Don't buy into the doubt and keep stacking if you can afford it.

angry_dad's picture
angry_dad (not verified) Mr. Pain Dec 15, 2016 5:16 PM

Both the chinx and russians are buying gold hand over fist as these low prices are a boon to them.

It's a great way to isolate themselves from a worthless paper currency.

Like everythign else on the planet, gold prices are rigged and these buyers are taking advantage of someone elses bad position.

Too bad the gringos got off the gold standard.

Look where we are now, $20 TRILLION in the hole and no way out.

 

Safelyundergroundlul's picture

I do wonder how posterity will look back at this. An indebted empire can only end one way, can't it. 

eclectic syncretist's picture

With only $1.2 trillion dollars and coins in circulation, this could become a problem for the imagineers at the Fed and criminal cartels. I wonder if the Chinese are settling for the "numbers in cyberspace" as payment ruse that the banksters are pushing so fervently now.

itstippy's picture

"Cash equivalent" cyberbucks and physical currency are fungible. Money in checking accounts and US Treasury Bonds for example, while just numbers in cyberspace, are treated as cash.  If need be the US Treasury could print or coin physical currency equal to the amount of "cash equivalent" cyberbucks in circulation without impacting the value of the dollar at all.

Non-cash-equivalent cyberbucks are the problem.  Money that people are counting on receiving in the future.  Pensions.  Mark-to-model financial products.  Asset-backed securities whose value is calculated by unrealistic valuations of the underlying assets.  Derivatives.  Vehicles and other high-value products marked as "sold" on corporate balance sheets when they're actually still sitting in retailers' inventory waiting to be sold (channel stuffing).  Illiquid 401K accounts stuffed with wildly overvalued stocks.  Basically, financial products that promise to gladly pay you Tuesday for a hamburger today.  The proliferation of these debt-backed financial products went wild with the repeal of Glass Steagall, and many holders of these financial time bombs believe they are "cash equivalent" cyberbucks because they see an account balance on their computer screens.  A lot of people are not going to get paid.