In his November Webcast, DoubleLine's Jeff Gundlach warned that as a result of rising hedging costs, US Treasury bonds have become increasingly unattractive to foreign buyers. This can be seen in the chart below which shows the yield on the 10Y US TSY unhedged, and also hedged into Yen and Euros. In the latter two cases, the effectively yield plunges from over 3%, to negative as a result of the gaping rate differential between the Fed and ECB or BOJ.
This is also one of the reasons why, as the next chart from Gundlach showed, foreign holdings of US Treasurys have been declining in recent years, and dropped to just over 36% as a percentage of total holdings, the lowest in over a decade, as domestic holdings of US paper have risen to just shy of 50%, and near all time highs even as the Fed's own holdings continue to shrink thanks to QT.
Which brings us to today's latest monthly TIC data which showed that, as Gundlach would expect, the holdings of the two largest foreign US creditors, China and Japan, declined to new multi-year lows.
As shown in the chart below, China’s holdings of U.S. Treasuries fell to the lowest level since mid-2017 as the world’s second-largest economy sold US reserves to stabilize the yuan which has been depreciating in recent months due to the ongoing trade war.
Chinese holdings of U.S. Treasuries declined for a fifth month to $1.139 trillion in October, from $1.151 trillion in September, a $12 billion decline. Despite the drop, China remained the biggest foreign creditor to the U.S., followed by Japan whose Treasury holdings also dropped by nearly $10 billion to $1.019 trillion, the lowest since 2011.
Investors had been searching for clues whether China is dumping its vast holding of U.S. Treasuries to retaliate against U.S. tariffs, though Beijing has given no indication it’s doing so; meanwhile while the TIC data is relatively accurate, it tends to be revised rather materially which is why it is certainly possible that China's real holdings, when adjusted for valuation and currency changes, are far lower (or higher).
Of course, instead of selling Treasurys, China may have decided to hold on to its reserves and allow the yuan to depreciate against the USD, but not too much: so far 7.00 has emerged as a "red line" for the PBOC. The Chinese currency has already depreciated more than 4 percent against the dollar in the past year amid signs of an economic slowdown and capital outflows.
Going down the list, while Russia's Treasury liquidation was well documented in June and July, two new aggressive sellers of US paper emerged in the latest data: the United Kingdom, whose Treasury holdings declined from $276.3BN to $263.9BN...
... and, surprisingly, Trump's new BFF Saudi Arabia, which sold $5BN Treasuries in October, its biggest monthly sale since the summer of 2016, bringing its total holdings to $171.3BN.
Not everyone was a seller: the infamous Belgium, host of Euroclear, added another $5 billion in October after buying $10 billion in September, bringing its total to $169.7BN, likely working on behalf of some unknown foreign entity, while France reversed its September liquidation, and bought $12BN in TSYs, after selling $16BN the month prior.
In total, the major foreign holdings of US Treasury securities dropped by $26bn to $6.20 trillion, the lowest number since April 2018.
Finally, away from US Treasuries, and looking at total flows, foreigners sold a net total of $6.5BN in long-term US securities, led by a $22BN sale of US corporate stocks.
What was perhaps more notable is that in October, foreigners sold another $22.2BN in US stocks, the 6th consecutive month of selling, a new record long stretch of foreign sales of US equities, and one during which official and private foreign investors sold a total of $124 billion over the past 6 months, also record high.
The bottom line: Trump told the world he doesn't need its generosity to either fund the US deficit or prop up stocks, and according to recent data, the world has taken up Trump on his dare, and has been actively liquidating US securities.