Presenting The Shocking Source Of US Treasury Demand In The Past Year

Tyler Durden's picture

When one thinks US Treasurys, and demand thereof, two entities pop into mind: the Federal Reserve, which over the past 3 years has been the biggest institutional buyer of US paper, and China, which is the largest foreign holder of US TSYs. Yet over the past year something curious happened: when it comes to setting marginal demand for US Treasurys, it was neither the Fed, whose sterilized Operation Twist has kept its holdings of US Tsys relatively flat, nor China, which has actually been a major seller of US paper, that has been the dominant source of marginal demand for Uncle Sam's never to be repaid obligations. Japan.

That's right, as the chart below shows using TIC data, even as China was quietly selling its paper (and that accounts for UK holdings, aka Chinese offshore operations) in the beginning of the year, taking its total from over $1.3 trillion to $1.15 trillion in December, where it has stayed without moving at all in 2012 as China entered a buyer's strike mode, it was Japan who quickly stepped in to fill the void. And what a void it has filled. According to TIC data, Japanese holdings of US paper have soared from $882 billion in June 2011 to a whopping $1119 billion a year later. In the process the spread between Chinese and Japanese holdings of US TSYs has collapsed from $430 billion to a tiny $43 billion and at this rate Japan will overtake China as the top foreign holder of US paper within 3-4 months! 

Why is this shocking. Well, for one thing, because as the chart below shows, Japan is about to surpass JPY1 quadrillion in total debt. In other words, the last thing the country needs is being saddled with more worthless, zero yielding paper...

No surprise there. In fact, as we have shown before, the Japanese debt debacle, whose debt/GDP is far far greater than even Greece's is well known. Also known is that even the smallest increase in prevailing Japanese interest rates will awake the colored swan that destroys Japan's precarious deflationary balance of the past 30 years.

The other major issue is that Japan's export powerhouse days are long gone, and while China reinvesting trade surplus into US paper makes perfect sense, Japan doing the same is stupid, simply because its surplus is hardly large enough for the country to avoid prefunding its imminent demographic crunch.

Which begs the question: is the only reason why US debt is largely bid because of Gresham's law? Are Japanese investors so sick of the tiny returns on JGBs they have no choice but to rotate into US paper, which despite its quite meaningless yields, at least provides a greater return than Japanese paper? And how much longer can this continue before the rotation of JGBs into TSYs is accompanied by wholesale selling of Japanese paper, and the Kyle Bass scenario comes into play? Also, one wonders, what is China buying with all those dollars, if indeed, it has been a net seller of US paper in the past year?

We will find out soon. But more importantly, at least we now know who has been the source of real marginal demand for US paper in the past year at a time when China was selling and the Fed was staying put, even as the US Treasury issued another $1 trillion in paper.

Domo arigato Japan. Don't expect to get any of this money back though.

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Short Memories's picture

Seems it was very expensive getting the US to agree to move a base from Okinawa to Guam... :-\



Popo's picture

Q:  "Also, one wonders, what is China buying with all those dollars"

A:   Africa.

SWRichmond's picture


Also, this article is evidence of the BoJ behaving just like SNB.  Maintain the peg, and thus the export market, at all costs.

chistletoe's picture

are you suggesting that Japan is manipulating its currency?  manipulating exchange rates?  does Pelosi know about this? Geithner?  They need to get on this right away, don't they?

Fukushima Sam's picture

When a small, radioactive island country in the middle of its economic death throes is the largest owner of your paper, then what is your paper really worth?

bankruptcylawyer's picture

easy shmeezy, wait for japan to implode and then force them to take 1000 tons of gold in return for 1 trillion of all the paper they hold. ( a markup of over 20 times the current cost of gold ).

if not---threaten to throw the japanese to LOOT their country, and then leave them to be raided and occupied by china. 

genius. GENIUS. this is why military power trumps everything in the short run.

Disenchanted's picture



Confucius say drowning Nips grasp for any rope...

smlbizman's picture

maybe benny and the jets are just using japan as a conduit to cover their tracks...

BigJim's picture

Yes, and in return Benny is probably buying JGBs hand over fist through some anonymous* Cayman Island trust.

No wonder the asshole doesn't want an audit.

*not to be confused with eveyone's favorite HanBot

Precious's picture

"Japan's export powerhouse days are long gone."  

You only say that because you have no idea how Japanese trade currently works.

vast-dom's picture

markets worse than broken. they are shattered. japan is on kamakazi mission and perhaps they think they will be bailed out by the country whose worthless paper they hold with more worthless paper from said country in order to prop the shitshow up a bit longer. smart? clever? not really.

TPTB_r_TBTF's picture

neither clever nor smart; however, if the Asians wanna export their crap, then they had better ensure the Amerikans have the credit to buy it with.

El Oregonian's picture

It's damn hard to drain the cess pool when one hand is only using a tea cup to dip it out and all the while the other hand is filling it with a fire hose...

Turd Ferguson's picture

"Also, one wonders, what is China buying with all those dollars"

315 metric tonnes a/o May 31st is all that they can't conceal.

DeadFred's picture

Don't forget the stockpiles of copper, iron ore, oil and every other commodity that that can be safely stored without the worms destroying it. They know their dollars will buy a lot more 'stuff' now than it will later.

Cognitive Dissonance's picture

Hey Turd.

I just sent a small donation to your site. While I don't always agree with your views, it is VERY important to keep diversity of opinion alive and well in the financial blogosphere.

Thanks for keeping it going.

MillionDollarBonus_'s picture

"it is VERY important to keep diversity of opinion alive and well in the financial blogosphere"

How ironic ... libertarians claim to support diversity of opinion yet at the same time they have shown themselves to be completely intolerant of anyone who disagrees with them about "the evils of the Federal Reserve" or the immorality of bailouts. It's too bad that libertarians can't tolerate any dissent from their dogmatic views.

Cognitive Dissonance's picture

I beg your pardon. I'm a true blue American Neo-Con of the ancient and honorable Wall Street Clan.

You take that back now! Or I'll beat you until you're red, white and blue.

Edit: Opps, almost forgot the /sarc.

Precious's picture

MDB douchebag.  Go rent "Fight Club" again and this time watch it without jerking off.

Abiotic Oil's picture

I can never determine if your up arrows are from folks applauding your trolliness or from idiots who actually believe it?

jmcadg's picture

Funny also how if you point out the ineptness of the poster, especially with a few appropriate 'rude' words, you get a -1.

I like a choice swear word. Twat sounds so much better than Troll. But both are spot on.

indygo55's picture

There's more then one of 'em.


jmcadg's picture

Hard to believe MDB has any friends! But we do live in strange times :)

Inibo E. Exibo's picture

MDB is one of the reasons I read ZH.  There are trolls and there are trolls.  MDB has elevated it to high art.  It's like the Orange Blossom Special on a Stradivarius.

bankruptcylawyer's picture

i'm one of the people who give him down arrows because i think trolliness , while at times amusing, denigrates the general atmosphere of a forum.

i would venture  with certainty that most people who give him down arrows are taking his opinion at face value :)

krispkritter's picture

MDB...why don't you take a break and be a good troll and go fetch some Chick-fil-a for everyone?!

Precious's picture

MDB.  You have nothing to say.  That's why.

sessinpo's picture

You just made a perfect example of intolerance and you probably aren't smart enough to see it. LOL

Turd Ferguson's picture

Thanks, CD. You have always been a proponent and your support is much appreciated.

Rather than spam this thread, I thought I should c&p this clip from a post of mine made back in late June. This is still happening and everyone must be aware of the ramifications.

"All of that said, what we now know is this. Beginning some time ago, but continuing today at an accelerating pace, physical metal is being purchased in London and then delivered out of the system. Under "normal" circumstances, this is not necessarily unusual. The bullion banks simply expect this metal to return to them at some point, where it can be re-leased, re-hypothecated and re-delivered in the future. This is how it has worked for decades. However, this time it's different.

What I have learned and have since been able to confirm via a second source is this: London Good Delivery bars are being delivered to Eastern buyers. Instead of being vaulted inside the LBMA system, these bars are being sent directly to refiners. The bars are then being melted and recast in 1 kilogram sizes. The new bars are then being stamped with official, government insignia and sent on to vaults outside of the LBMA system and points east, never to return again. 

?What does this mean and why is this important? Quite clearly this information, if accurate, has several significant ramifications:

  • The Chinese and others are preparing for a new system. Whether it's simply a new gold pricing and delivery system to replace the LBMA/Comex or whether it's a new global trade settlement system that is guaranteed with gold is impossible to say, at this point. 
  • The physical gold supply of the LBMA and secondarily the Comex, much of which has been acquired/supplied through leasing, is being rapidly depleted and will not be coming back. 
  • The bullion banks, which have profited for years from leasing, trading, vaulting and the like, are about to feel the rather dramatic effects of this supply depletion."

Cognitive Dissonance's picture

The final phase of the looting was always to take the loot and exchange it for a real thing, or in your example LBMA Gold bars. The same process is occuring in prime (commercial) real estate. Who cares what price you pay when it's all just fiat. All you care about is ownership after the fact.

Got Gold? (and Silver of course)

Deo vindice's picture

Cognitive - real estate commercial or not as easy to hang on to. It will simply be taxed away or expropriated for some 'project' that may or may not ever happen. We don't actually own our homes as long as there are property taxes that can change at the whim of government officials.

Your alternative at the end of your comment is much more realistic as far as ownership goes.

Cognitive Dissonance's picture

It seems the financial elite are taking several tracks to prepare for the end game. They aren't worried about their commercial property being taxed to death or confiscated. After all, they pull the strings so I'm certain they will arrange for the government to step in and insist they receive several (property and income) tax breaks so that they can "save" all those jobs they just threatened to dump.

It is the little guys and gals who will be bulldozed into oblivion and the real reason we should physically own Gold and Silver. When it is in my physical possession, they must break down the door and take it, not just make it disappear with the stroke of the pen.

cranky-old-geezer's picture



The Chinese and others are preparing for a new system.


Wiith their world reserve currency status, our monetary system's leaders believe their monetary system is unbreakable, they can print and print and print without any danger, funding endless government debt, giving endless bailouts to whomever they want.  They believe they can flood the world with US dollars and their system still won't break.

But it doesn't matter what they think.  It matters what the rest of the world thinks.  And the rest of the world is quietly preparing to dump USD.

Would another worthless unbacked fiat currency topple USD from its king-of-the-hill position?   Euro perhaps?

No, of course not.  Euro is no better than USD.  It too can be printed till it floods the world, because it is a non-redeemable currency. 

Yuan / Remimbi perhaps?  No, of course not, same problem, it can be printed till it floods the world, again, because it is a non-redeemable currency.

What keeps USD in the king-of-the-hill position?  Very simple.  Most of it is habit.   USD has been WRC for decades.  Secondly because other nations like China buy newly issued US govt debt, sending dollars back into America, keeping worldwide supply of dollars in check.

But in QE1 and 2 we saw what happens when the Fed is the only buyer, using printed money.  USD dropped in value rapidly, because the worldwide supply of dollars started growing rapidly. 

Somehow they convinced Japan to start buying more of it.  Once again dollars are coming back to America, reducing worldwide supply, causing USD to strengthen against other currencies.

Japan is buying US treasury debt at the expense of their own currency (sorry for the pun).  It's ok for a while since the Yen has been appreciating against USD lately.  Printing Yen to buy dollars to buy US govt debt brings the Yen back down against the dollar.

But bottom line, the worldwide flood of USDs and Yens and Euros and Yuans and Remimbis is growing.  Everybody is printing to fund more debt of their respective governments and more bailouts of their respective banks.

Sure, they may be keeping that flood of currency printing in some sort of balance in their steady pace toward worthlessness, but it is a steady pace toward worthlessness, which means it's unsustainable.

But maybe it's not unsustainable.  USD has lost 99% of its original value and nobody seems to care.

While it may not be unsustainable, there is a growing danger that someone could introduce a redeemable currency, redeemable for gold, silver, something like that. 

A truly redeemable currency would be a game changer.  Every nation in the world would flock to it.  Except maybe America, arrogantly thinking their USD would still retain WRC king-of-the-hill status (with military help of course).

But what if the "introducer" of said redeemable currency had just as many nuclear weapons as America does, maybe more?



AnAnonymous's picture

Wiith their world reserve currency status, our monetary system's leaders believe their monetary system is unbreakable, they can print and print and print without any danger, funding endless government debt, giving endless bailouts to whomever they want. They believe they can flood the world with US dollars and their system still won't break.


This is not what they believe.

What they believe is that thanks to the USD, they can get the best of the mass consumption era, consuming the most of available resources, before the depletion era is entered.

And they are right.

US citizens will consume the world before the other nations manage to get out of the US world order web.

JeffB's picture

Bernanke was quite thrilled to get a new tool for his toolchest when Congress changed the laws allowing him to pay interest on excess reserves.

That is the way they've been able to print so much and keep inflation under some semblance of control.

Money held as excess reserves is pulled out of circulation and hence does not contribute to inflation. It isn't counted as money supply while it "sits in the vaults", so to speak.

They can print it, buy Treasuries or MBS or whatever else they desire and then use more fiat, at very low interest rates, to induce the banks to keep it with them and out of circulation.

Look at the Fed's chart of their excess reserves:

Excess Reserves of Depository Institutions (EXCRESNS)



Stock Tips Investment's picture

We must not lose sight of the strategic aspect of the debt. U.S., Japan and our major allies in Europe are the most indebted countries. The economy of these countries is growing very little and collecting more and more fragile. China, however, continues to grow (no debt) and buying commodities in large quantities. This is benefiting many small countries are now showing very solid and dynamic economies. The world is changing and this change is happening very fast. Our economy, despite all our problems, is more dynamic, flexible and robust than that of Japan and European countries. I think it's time to look though our strategic alliances.

Nothing To See Here's picture

How could you say....  Hara-kiri?

Dr. Engali's picture

Hey I recognize your avatar from some place. Are you new to this place stranger?

Cognitive Dissonance's picture

Bill, are you safely back at home base or are you still out chasing wild women all over the place?

Lie if you have too. :)

Precious's picture

Banzai.  Quit abusing your editor privileges.

midtowng's picture

You know you are entering the last days of a Ponzi scheme when even the insiders of the Ponzi scheme began putting their own money into the scheme to keep it alive.

FranSix's picture

I think the problems are in the UK, where they first managed to show up with bank runs and endless QE.  More so than Europe.  Europe can bail itself out if needed by consolidating their gold into the ECB.

Japan will have to allow negative nominal rates eventually.  So far, they have managed to stave off this eventuality.

khakuda's picture

Someone smarter than I could probably make a compelling argument that in a world free to send capital anywhere with the click of a button, Japan set off the race to the bottom in rates globally decades ago.  If/when it blows itself up in its Kyle Bass moment, forget the impact on Japan, I'm going to want to leave the planet.

youngman's picture

China is buying Africa...commodities....and farmland or at least crops...assets more paper......they have a lot more spys now....all around the world....Computer Hackers....and they are doing a little military investing on their know....a new Navy....Space...Air Force....things that go BOOM!!!