De-Dollarization Escalates: Russia Sells Off Record Amount Of US Treasury Bonds

Authored by Arkady Savitsky via The Strategic Culture Foundation,

The US Treasury Department report for April published on June 15 revealed that Russia sold $47.4 billion out of the $96.1 it had held in Treasury bonds (T-bonds). In March, Moscow cut its Treasury holdings by $1.6 billion. In February, Russia reduced its bond portfolio by $9.3 billion. Other holders did it too. Japan sold off about $12 billion, China liquidated roughly $7 billion. Ireland ditched over $17 billion.

The tariff wars unleashed by Washington stirred fears that financial markets may be in for a rough ride with American treasuries dumped by some partners, including such major holders as China and Japan, each holding over $1 trillion in bonds.

Russia has cut its holdings in American securities following numerous rounds of sanctions imposed by Washington against Moscow and amid the ongoing trade wars between the US and its allies and partners.

This is bad news and ominous warning for Washington. The foreign demand is critical to offset an expected surge in federal borrowing needs. The Treasury Department needs to finance the huge spending bill along with tax cuts that were passed by Congress in December 2017. It plans to auction off around $1.4 trillion in treasuries this year with a glut of sellers and a shortage of buyers in the bond market the government plans to add $600 billion to.

The companies buy back their own shares to boost capitalization. The stock prices are overvalued. The Fed's monetary policy does not spur economic growth amid the growing national debt. The bond market does not look attractive anymore. Looks like there is a big change on the horizon that nations will dump US debt in case of trade war.

And the supremacy of the US dollar is not as solid as many people believe it is. A sell-by date as a global reserve currency is looming. The process of de-dollarization is gradually gaining momentum.

Moscow and Beijing are making agreements to move away from the American currency. On June 8, their leaders signed an agreement to raise the share of trade settlements in national currencies. Last year, nine percent of payments for supplies from Russia to China were made in the Russian rubles. In October 2017, China launched a payment system for transactions in the renminbi and the Russian currency. The launch of the petro-yuan allows Moscow and Beijing to use national currencies for settlements.

Russian companies paid for 15 percent of Chinese imports in the renminbi. For comparison, only three years ago the respective figures were two and nine percent. The gradual shift away from the USD is on the agenda of BRICS. China and Japan started direct trading of their currencies as far back as 2012 to hedge the risk of the dollar's fall in the long run.

Stanley Druckenmiller, the billionaire investor, believes that this is the time when “all you need is gold and all other investments are rubbish”. Top money managers are also recommending gold. Other countries are repatriating their gold reserves from the US Federal Reserve.

Russia has increased its gold reserves in order to diversify away from the dollar. It has recently concluded a cooperation agreement with China on developing the Klyuchevskoye gold ore deposit in the Trans-Baikal region. It is expected to extract 12 million tons of ore to produce 6 tons of precious metal yearly. Gold is considered important by both countries. The Central Bank of Russia has been increasing its gold holdings for three years now. Today, it has the fifth largest gold reserves in the world to make Russia immune to fluctuations of global currency market. This is a good investment to fend off US sanctions, tariff impositions and dollar fluctuations.

The worse the US relations with other countries become, the more likely are other nations to reconsider their reliance on the dollar. The US bonds market is going through hard times, the dollar is facing uncertain future and gold is becoming the best investment one could think of. With sanctions constantly used as a tool of foreign policy, trade wars waged, and the huge debt growing, America’s economic prospects are clouded in doubt to make other countries gradually move away from its currency and T-bonds. It does not augur well for the US. Its policy of confrontation makes it weaker, not stronger. There are clear signs the American century is coming to an end.

Comments

Oldguy05 The_Juggernaut Tue, 06/19/2018 - 23:18 Permalink

It will. This is one of the many reasons I try to convert my loose fiat dollars to PMs....and other things, while keeping a pile of fiat....can't pay $400 for anything. Pffffft! Please. ( I need and have protection from those [mostly democratic] idiots )

democratic=communist...I realize they have killed millions in the past and I don't trust em :)

I also realize we have too and I don't trust us either :)

In reply to by The_Juggernaut

el buitre BaBaBouy Tue, 06/19/2018 - 23:43 Permalink

The point of countries' central banks holding treasuries of other countries and particularly US treasuries is for trade settlement.  With the ridiculous sanctions against Russia for Victoria Noodleman and Jihadi John Brennan's Ukraine coup, Russia is doing far less trade with the US and more direct trade with rubles.  Thus they have a much reduced need for T-Bills.  Probably taking the the US cash and buying gold and silver at today's bargain basement prices.

In reply to by BaBaBouy

Harry Lightning tmosley Wed, 06/20/2018 - 03:03 Permalink

Do you realize that that the Russians sold the bottom of the price range, and after they finished selling the US Treasury market started a rally that continues as I write ?

That's just a prelude of things to come, nation's trying to use their debt security holdings as a lever in trade negotiations and get butt fucked for their efforts. 

Word travels quickly in the Treasury market. No one can hide their identity for long if they are making huge positions. Even if they do it all through electronic platforms, their clearing bank knows who did what, and that information gets passed around the market faster than a whore drops her drawers. And the Federal Reserve knows whose selling and buying, as all the transactions clear through their wire transfer system. Lots of those Fed people have big hooks in with the primary US broker dealers. Some used to work there and some hope to work there. So the secrets are not safe with them.

As soon as word is passed that there is a large seller, the bidder's bids get weak. They don't pull their bids, for that would look likle they know some kind of inside info. Rather they buy a lot less at each price point, and let the market move lower without challenging it...all the while accumulating bonds at a discount due to the mistaken belief of some nation or firm that it can hold the US government hostage through the bond market.

Of course, because these buyers conserve capital at progressively lower prices as the big seller off loads, they are ready to buy the ranch once the seller is out of ammo. And that's what they do, first because the market is trading at a discount due to the large seller, and secondly because they want to thumb their nose at the moron who sold so stupidly.

And for the seller, they only hurt their own finances by coming in and selling the kitchen sink. For as they drive prices down, the value of what they still have to sell decreases, and anything still left in the vault is worth a heck of a lot less. 

Its a stupid amatuer-ish strategy to try and influence political policy by seeking to hurt the US through its own bond market. The US has too  any weapons to defend its interest in interest rate yields, and no one player or even cartel will be able to alter the course of where the Treasury and Fed want their interest rates to be. And then of course, there's the 20 trillion dollars sitting near the all time highs in US stocks. 6 trillion dollars could transfer out of stocks and into bonds, funding current budget deficits for the next six years, and stocks would still be at the place they were on election night of 2016. Not a horrible price to pay for a petulant trading partner acting like a child.

Cutting off the nose to spite the face just leaves you without a nose. There are better ways to retaliate against US tariffs without taking a beating on your p&l. The best way is to turn the tables and raise prices on the items you export to the US that they need and therefore do not erect tariffs against. Force a tariff on the US in items they need, and you will spike inflation in the US, which would cause all kinds of losses for their consumers and investors alike. You'd still be inflicting harm on your own portfolios and your export business, but the pain the US would have to bear from such a move would be great enough to make them re-consider if they really want a trade war.

Honestly, in the end everyone loses when trade imbalances become so large that tariffs are needed to level the playing field. The best way to avoid tariffs is to drop them across the board. Give American companies more access to sell their goods in your markets, and then everyone wins. This entire matter reminds me of the story of the guy who had his wallet stolen by the prostitute he hired, and then tries to make a report to the police. Countries that have huge trade surpluses are the most restrictive of countries when it comes to them allowing foreign competition into their markets, which makes them a great purveyor of crocodile tears.

If you want to maintain your sales to a country from whom you enjoy a huge trade surplus, give them the opportunity to sell their goods in your country so their trade deficit drops while competition benefits your consumers. That's the smart way to retaliate against tariffs.

In reply to by tmosley

Harry Lightning Joiningupthedots Wed, 06/20/2018 - 07:51 Permalink

The value of a currency is dependent on the value of the economy it represents. I don't care if its a Fiat or a Volkswagon.

So tell me where the US economy is in ten years and I'll tell you what the value of its currency will be. 

Personally, I believe you are correct because I think the foundation of the US economy is weak, and once a majority of baby boomers is sucking progressively more of the nation's resources through Social Security and Medicare, the amount of capital left for investment purposes will not be enough to sustain America's businesses. At that point the US currency will decline in buying power, but may remain strong versus currencies around the world as their respective economies may be getting hurt worse than in the US.

Perhaps precious metals would rise significantly in value at that point. The problem with that hypothesis is who will have any money to pay for the gold or silver, especially if a one ounce gold coin rose to several thousand dollars in exchange value ?  As it is now, on average people in the US have less than a thousand dollars in savings. Comes a bad recession where the buying power of the currency implodes, and who will be able to make change in gold for the coin you produce at the Food King ?

In reply to by Joiningupthedots

brushhog Harry Lightning Wed, 06/20/2018 - 08:50 Permalink

You wont be paying for your groceries with gold at the food king. The world financial markets are MASSIVE and even a one percent global shift out of other assets and into gold would push the price to ten thousand an ounce. No the average person with less than a thousand dollars to his name is not going to be dealing in gold or trading in gold. But there will still be lots of wealth out there and though it may reduce considerably in a collapse, it will still disproportionately find it's way into gold as a safe haven.

How will you sell your gold? The same way you do now, through a gold broker. The gold market will remain the gold market but it will hold a larger share of dwindling global wealth.

In reply to by Harry Lightning

Harry Lightning brushhog Wed, 06/20/2018 - 12:48 Permalink

Fir your scenario to occur the dollar and other currencies would have to collapse in terms of buying power. No one will want to hold paper currency, which is why the value will plummet. Even the gold broker will not want paper money for his gold. So you will be left with an asset that you cannot sell except for some kind of real asset like real estate, and one that cannot serve as a medium of exchange because of its physical nature. Unless they start mining gold pellets for use at the Food King. 

You see, the success of your idea is also its greatest flaw, that being the collapse of paper money. Its not a good outcome.

Reminds me of the stories of people who had nuclear bomb shelters installed in their yards so they would be safe in case the nukes start flying. They all soon realized that they would not be safe at all, because their neighbors knew about the shelters and would fight them to get inside during a nuclear event.

In reply to by brushhog

pc_babe Harry Lightning Wed, 06/20/2018 - 06:23 Permalink

I couldn't agree more HL. Very well reasoned and written.

US has its issues for sure -- massive debt and the printing of endless fiat are a reckless course at best. But it has vast assets via it's peoples' ingenuity and economy compared to the likes of Russia or even China still.

Russia doesn't produce much of anything, so it needs to spend its gold (or rubles, or yuan or SDR) to buy stuff. Charlie Munger is correct, gold is a barbarous relic. Putin is a barbarous simpleton.

In reply to by Harry Lightning

DaiRR junction Wed, 06/20/2018 - 00:18 Permalink

War, same solution favored by the Deep State which of course is in many ways an extension of Rothschild.  Dollar down will happen, the question is when.  Competing factors of BRICS de-dollarization while other sectors clamor for dollars.  Some HAL 9000 somewhere has the solution.  Meanwhile, I prepare for the big move into Au, but not pulling the trigger yet.

In reply to by junction

Jack Oliver Truther Wed, 06/20/2018 - 00:29 Permalink

If you thought Trump (or whoever controls him) is trying to bring back American jobs - you are delusional !! 

EVERYBODY wants out of the $US !!  

The trade war is just an excuse - China  are being punished !! 

Won’t work though - China and Russia have been planning this for years !!! 

In reply to by Truther

runningman18 LetThemEatRand Tue, 06/19/2018 - 23:00 Permalink

That's not really the point.  The point is, the Federal Reserve is tapped out and has to cut stimulus while the only other major buyers, foreign central banks, are also cutting investment.  Russia is just the beginning.  Watch as China, EU countries, etc. follow their lead as the trade war continues.  This will end with the death of the dollar's world reserve status, guaranteed.  Stimulus doesn't solve the problem of lack of demand for US debt or the dollar, it only causes eventual hyperinflation.    

In reply to by LetThemEatRand

OverTheHedge runningman18 Tue, 06/19/2018 - 23:39 Permalink

Lack of demand means higher interest rates which means recession (recent zh article suggested that we only have a 1% wiggle room before it affects the economy).

Or Belgium just monetizes all the debt, on the QT, and life goes on as normal? This would be that deflation/inflation inflection point: do they default, or do they print? Decisions, decisions......

In reply to by runningman18