Visualizing The Upcoming Treasury Funding Crisis

In his interview yesterday Julian Robertson expressed substantial concerns about the ongoing US debt funding threat, using words such as "Armageddon" to describe what will happen when and if China and Japan stop buying US debt. More disturbingly, as was pointed out on Zero Hedge first, and was subsequently picked up by the WSJ, the Fed has accounted for half of all Treasury purchases in Q2 ($164 billion of total of $339 billion).

Below we present data for what could be construed as a Treasury funding crisis borne out of lack of demand for longer maturities, once the QE portion of UST purchases expires. This crisis could hit as soon as October.

The first chart highlights total UST foreign holders as per TIC data:

Of which holdings of bonds was almost flat:

Yet bills were up a whopping $400 billion:

Summary: foreign purchasers are congregating exclusively around the front end of the Treasury curve, meaning that the primary net purchaser of dated bonds has been the Federal Reserve. As everyone knows by now, the Fed only has $10 billion left out of the $300 billion total allotted for Treasury QE. That should expire next week. The question then becomes will we see another major steepening leg in the UST curve as yields on long-dated paper finally catch up to the real supply-demand curve absent the Fed's manipulation of the equilibrium point. Or will we see an outright funding crisis as foreigners pull out entirely of all treasury purchases, not just Long-term USTs.

The time of unravelling may be upon us sooner than most think.

Compliments to Gunther for the primary data.