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Unprintable Alternative to Debt, De-Dollarization, Not Just China, Leaving the West for the East

“Gold is money. Everything else is credit.”
~ J. P. Morgan

Earlier this week, I told you how China has accelerated its de-dollarization efforts with rapid-fire sales of U.S. debt.

The country offloaded $53.3 billion worth of U.S. Treasuries and U.S. agency bonds. This is the largest single sale of U.S. debt in its history.

But, as I explained, even U.S. allies like Belgium and Switzerland have recently dumped an impressive $20 billion and $43 billion worth of Treasuries, respectively.

If this trend keeps up, it could be a big problem for the U.S. government. That’s because about one-third of its debt, or $8 trillion, is held by foreign countries.

The Unprintable Alternative

Now, the main reason foreigners own such a large portion of U.S. debt is simple: the U.S. dollar is the world’s primary reserve currency.

Currently, central banks hold about 58% of their foreign reserves in U.S. dollars. To earn returns on all this cash, they invest it in U.S. Treasuries, which are considered the safest assets in the world.

There’s just no alternative… or is there?

Well, China certainly seems to think so.

Just take a look at the next graph showing China’s holdings of U.S. Treasuries and gold as a percentage of its foreign reserves since 2015.

The chart above shows that as China cut back on U.S. debt, it ramped up its gold purchases. This inverse relationship between China’s gold and U.S. debt holdings became really noticeable around 2018, when the trade war with the U.S. kicked off. And as I mentioned in my last essay, by 2019, China had given up its spot as the biggest holder of U.S. debt to Japan.

…click on the above link to read the rest of the article…

China Just Dumped the Largest Amount of U.S. Debt in History

May 22, 2024

China Just Dumped the Largest Amount of U.S. Debt in History

Dropping It Like a Hot Potato, the Lowest level of U.S. Debt Ownership in Decades, Not Just a “China-Leaning” Countries Problem

At this point, the government is completely and totally bankrupt. It’s like Wile E. Coyote that’s walked off a cliff, but doesn’t really realize it yet.
~ Doug Casey

We just learned that China has accelerated its de-dollarization efforts with record sales of U.S. debt.

Turns out, China dumped a staggering $53.3 billion worth of U.S. Treasuries and U.S. agency bonds in the first quarter of this year.

Interestingly, the Chinese government announced the sale right after issuing a joint statement with Russia, where both nations emphasized their resolve to keep moving away from reliance on Western countries.

No doubt, this will seriously dent the appeal of U.S. debt on the international market. But let’s take a closer look to see exactly why.

Yes, It Is a Big Deal...

Now, this isn’t the first time China has unloaded a portion of the U.S. debt it owns. For example, the country sold $21 billion in U.S. Treasuries and agency bonds in late 2023.

But what makes this latest dump stand out is that it’s the first time China has shed such a big chunk of debt so quickly.

The move brings the nation’s holdings of U.S. government debt to around $767 billion. That’s the lowest level of ownership in decades.

It’s quite something when you think about it… Just a few years back, China was leading the pack in investing in U.S. debt. Things changed around 2018 though, when the trade war with the U.S. began. By 2019, China ceded the position to Japan as the biggest holder of U.S. debt.

…click on the above link to read the rest of the article…

Is China Dumping US Treasuries and Buying Gold? Bloomberg Says Yes, Pettis Uncertain

May 18, 2024

Is China Dumping US Treasuries and Buying Gold? Bloomberg Says Yes, Pettis Uncertain

Bloomberg reported that China is selling a record amount of US debt while buying gold. Previous reports of debt selling were false. Let’s check in with Michael Pettis at China Financial Markets for another opinion.

China Sells Record Sum of US Debt

Bloomberg reports China Sells Record Sum of US Debt Amid Signs of Diversification

China sold a record amount of Treasury and US agency bonds in the first quarter, highlighting the Asian nation’s move to diversify away from American assets as trade tensions persist.

Beijing offloaded a total of $53.3 billion of Treasuries and agency bonds combined in the first quarter, according to calculations based on the latest data from the US Department of the Treasury. Belgium, often seen as a custodian of China’s holdings, disposed of $22 billion of Treasuries during the period.

China’s investments in the US are garnering renewed investor attention amid signs that tensions between the world’s largest economies may worsen. President Joe Biden has unveiled sweeping tariff hikes on a range of Chinese imports, while his predecessor Donald Trump said he might impose a levy of more than 60% on Chinese goods if elected.

“As China is selling both despite the fact that we are closer to a Fed rate-cut cycle, there should be a clear intention of diversifying away from US dollar holdings,” said Stephen Chiu, chief Asia foreign-exchange and rates strategist at Bloomberg Intelligence. “China’s selling of US securities could speed up as US-China trade war resumes” especially if Trump returns as president, he said.

China is Buying Gold

One part of the story is not in question. That part pertains to China buying gold.

Is China Dumping US Debt?

I asked Michael Pettis that question yesterday. Pettis graciously replied with an email this morning plus a five-part Tweet.

…click on the above link to read the rest of the article…

If Treasury Bonds Hit 5%, You’re Gonna See Some Serious Sh*t

May 2, 2024

If Treasury Bonds Hit 5%, You’re Gonna See Some Serious Sh*t

Almost as if all of us Austrian Economists (read: any carbon based life form using common sense when it comes to finance) live in an echo chamber together, a third expert I respect came out over the last few days and has warned that 5% on the 10 year treasury would be the breaking point for markets and the economy.

If my calculations are correct, when this thing hits 5%…you’re going to see some serious sh*t.

Peter Schiff now argues that the Federal Reserve and US Treasury are being forced to confront the reality that inflation is persistent, which has led to an increase in yields, recently reaching 4.7% on the 10 year, the highest since November.

The thought process, for financial neophytes, is that bond traders will continue to sell bonds, driving yields up, in order to make it difficult for the Fed to cut rates — and essentially forcing the Fed to fight inflation head-on instead of capitulating to the economy and markets (should they crash).

This follows Jack Boroudjian’s analysis from last week, stating that rates will keep drifting higher and that 5% to 5.5% is the danger zone: Yields To Trigger “Serious Earthquakes” Across Economy: Jack Boroudjian

It also follows Harris Kupperman’s similar take: Bond Market About To Have An “Aneurism”: Harris Kupperman

Put simply, the Fed faces a dilemma: it needs to raise rates to combat inflation and make Treasuries more appealing, but higher rates would exacerbate the already burdensome debt servicing costs and threaten industries reliant on borrowing. Or, to use the parlance of my recent interview with Matt Taibbi, higher rates simply serve up another day of “sh*t burgers” to the economy, whereas lower rates act as rocket fuel for economic activity (and market confidence).

…click on the above link to read the rest of the article…

Weekly Commentary: Dangerous Addiction

July 27, 2021

Weekly Commentary: Dangerous Addiction

July 20 – Reuters (Karen Pierog): “Risk-off sentiment that drove Monday’s sell-off on Wall Street and rally in U.S. Treasuries widened credit spreads on corporate bonds to multi-month highs. The spread on the ICE BofA U.S. High Yield Index, a commonly used benchmark for the junk bond market, spiked from 318 bps on Friday to 344 bps as of the last update late Monday, its highest level since late March, according to Refinitiv data. It was also the biggest widening in a day since last June.”

The S&P500 dropped 1.6% in Monday trading, as U.S. stocks followed global equities lower. The VIX Index spiked to 25, a two-month high, while 10-year Treasury yields dropped to a five-month low 1.17%. Germany’s DAX and France’s CAC 40 indices sank 2.6% and 2.5% – to lows since May. Hong Kong’s Hang Seng Index fell another 1.8%, with the Hang Seng China Financials Index trading this week at an eight-month low. Global “Risk Off” was gathering momentum.

July 20 – Bloomberg: “Fresh signs of a cash crunch at China Evergrande Group sent shares and bonds of the world’s most indebted developer to new lows on Tuesday, stoking fears of broader market contagion. The property giant’s stock tumbled to the lowest level since April 2017, extending its two-day loss to 25%. Several of Evergrande’s local and offshore bonds sank to records, with its dollar note due 2025 falling to as low as 54 cents. Bonds of other junk-rated Chinese borrowers declined, while a gauge of developer shares dropped to a nearly three-year low. The nation’s bank stocks also slumped.”

July 20 – Bloomberg (Rebecca Choong Wilkins and Alice Huang): “Rising concerns over the financial health of China Evergrande Group are weighing down the broader market of high-yield bonds as contagion fears rise…
…click on the above link to read the rest of the article…

Weekly Commentary: Under Fire

July 17, 2021

Weekly Commentary: Under Fire

The week had an ominous feel. Ten-year Treasury yields dropped another seven bps to 1.29% – completely disregarding much stronger-than-expected reports on consumer and producer prices. German bund yields fell another six bps to a three-month low negative 0.35%. Equities were down for the week in Europe, but the notable equities weakness was posted by the broader U.S. market. The Midcaps dropped 3.3%, and the small cap Russell 2000 sank 5.1%. Risk aversion typically leaves its initial mark at the “Periphery.”

Treasury market notwithstanding, inflation has become a problem in more ways than one. Consumer Prices (CPI) jumped 0.9% in June, versus expectations of a 0.5% increase. Year-over-year CPI was up 5.4% (expectations 4.9%), the strongest jump since 2008. And for analysts with issues with year-over-year “base-effects”, consumer inflation was up 3.3% in only five months. Core CPI also gained 0.9% for the month, with a 4.5% y-o-y increase. Producer Prices rose a data series record 7.3% y-o-y. Import Prices jumped 1% for the month and 11.2% y-o-y. University of Michigan one-year Inflation Expectations rose to 4.8%, the high since the summer of 2008. Also, at 4.8%, the New York Fed’s survey of one-year inflation expectations jumped to the highest level in data back to 2013.

To this point, inflation has not been an issue for the markets. It has become a problem for millions of Americans. For the institution of the Federal Reserve, it’s a metastasizing malignancy.

I understand why each Fed official sticks tightly with the party line “inflation will be transitory.” They don’t want to rattle the markets with thoughts of a traditional tightening cycle. And I think I understand why they adopted their framework aiming for a period of above target inflation – and why they swore off responding to incipient inflationary pressures. Again, they sought to retain flexibility to remain highly accommodative monetary policy, ensuring financial conditions would remain exceptionally loose (and markets high).
…click on the above link to read the rest of the article…

Fed Drains $485 Billion in Liquidity from Market via Reverse Repos, Undoing 4 Months of QE, Even as QE Continues, Total Assets Near $8 Trillion

May 28, 2021

Fed Drains $485 Billion in Liquidity from Market via Reverse Repos, Undoing 4 Months of QE, Even as QE Continues, Total Assets Near $8 Trillion

It’s a crazy situation the Fed backed into as tsunami of liquidity goes haywire, banking system strains under $4 trillion in reserves, and General Treasury Account gets drawn down.

This morning, the Fed sold a record $485 billion in Treasury securities via overnight “reverse repos” to 50 counterparties, beating the prior record set on December 31, 2015. These overnight reverse repos will mature and unwind tomorrow morning. Today, yesterday’s $450 billion in overnight reverse repos matured and unwound, and were more than replaced with this new batch of $485 billion in overnight reverse repos.

Reverse repos are liabilities on the Fed’s balance sheet. They’re the opposite of repos, which are assets. With these reverse repos, the Fed is selling Treasury securities to counterparties and is taking their cash, thereby massively draining liquidity from the market – the opposite effect of QE.

In past years of large reserves following QE, banks shed reserves via reverse repos, reducing reserves on the balance sheet and increasing their Treasury holdings, to dress up their balance sheet at the end of the quarter, and particularly at the end of the year. Reverse repos declined after the Fed started reducing its assets during Quantitative Tightening in 2018 and 2019. But the current record spike is taking place in the middle of the quarter, a sign that the enormous amount of liquidity is going haywire:

This is a crazy situation that the Fed backed into.

Even as liquidity is going haywire, and as the Fed trying to deal with it via reverse repos, the Fed is still buying about $120 billion per month in Treasury securities and mortgage-backed securities, thereby adding liquidity.

…click on the above link to read the rest of the article…

“Heads, Gold Wins; Tails, Gold Doesn’t Lose” – Jim Rickards

May 19, 2021

“Heads, Gold Wins; Tails, Gold Doesn’t Lose” – Jim Rickards

A set of gold and silver chess pieces. Credit Luis Muzquiz

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: How gold could soon break out, U.K.’s Royal Mint experiences peak bullion demand, and why silver can go up much higher.

Heads, Gold Wins; Tails, Gold Doesn’t Lose

As The Daily Reckoning contributor Jim Rickards notes on Zero Hedge, the worst-case scenario for gold appears to be running its course. It’s often stated that the stock market is gold’s primary competitor, but the inverse correlation between the markets has been absent for some years. Instead, bonds position themselves as gold’s archnemesis as investors look at the two and ask themselves: which is the better safe haven?

When the $900 billion December bailout was followed by a $1.9 trillion one and promises of $3 trillion more to be printed, investors were quick to expect inflation, and with good reason. Taking a look at the two safe-havens, Rickards hypothesizes they believed Treasuries were preferable with rates climbing off the floor of 0.508% in August 2020, and bought bonds instead of zero-yield gold.

To Rickards, this is what caused gold to remain rangebound over the past few quarters, (though it’s a pretty good range). The problem is that investors were too hasty in their inflation expectations, while placing too much faith in government bonds.

Rickards believes 10-year Treasury yields peaked at 1.74% on March 31 and are unlikely to spring back up. That view isn’t difficult to corroborate given the dire straits of the global bond market.

…click on the above link to read the rest of the article…

US Facing Mounting Debt Amid Global Pandemic – ABC

July 25, 2020

US Facing Mounting Debt Amid Global Pandemic – ABC

Good interview with Professor Barry Eichengreen of UC Berkeley, a good friend of GMM, and odds on favorite to be a Nobel laureate one day. We agree with him that now is not the time to worry about the public debt as we are already down this rabbit hole and the economy is on the verge of complete implosion, risking plunging our society into anarchy without another rescue package.

We also hate what we see: large well-capitalized corporations and entities getting PPP loans, which will be forgiven, some dead beats using their PPP loans to buy Teslas, trade stocks, and gamble in Las Vegas, not to mention the lack of planning and total incompetence of the policymakers. He quotes Voltaire’s famous exhortation, used many times here at the Global Macro Monitor, “do not let the perfect be the enemy of the good.”

No MMT Discussion?

Did you also notice not one peep about the Fed buying up all the Treasury debt and effectively monetizing the deficit…err MMT…and supporting other debt markets?

We heard some bozo on CNBC today saying the Treasury is having no problem floating its debt to the market. Are. You. Fricking. Kidding. Me? What market?

Nobody really knows for certain, but our priors are if the U.S. Treasury was completely dependent on the markets to finance itself – that is no central bank (Fed and foreign) buying of its marketable debt — the 10-year yield would be well north of 6 percent, and that is very generous, in our opinion.

Do Your Homework

Folks, do your homework. Granted, it’s impossible to completely grasp all the intricacies of the global economy and markets with their infinite feedback loops, and futile to even try, but at least try and grasp the basics.

…click on the above link to read the rest of the article…

Fed Launches Repo Facility To Provide Dollars To Foreign Central Bank

March 31, 2020

Fed Launches Repo Facility To Provide Dollars To Foreign Central Bank

With US dealers no longer using the Fed’s repo facilities (this morning we had another “no bid” overnight repo with just $250MM in MBS submitted for a $500 billion op) as the Fed soaks up all securities via its aggressive QE which is still buying $75BN in paper each day, perhaps Powell felt a bit unloved and at 830am this morning the Fed unveiled yet another “temporary” emergency liquidity providing facility, this time to foreign central banks, in the form of a repo facility targeting “foreign and international monetary authorities”, i.e. foreign central banks which will be allowed to exchange Treasuries held in custody at the Fed for US dollars.

In other words, just a week after the Fed “enhanced” its swap lines with central banks and included a bunch of non G-5 central banks to the list of counterparties, it has found that this is not working – perhaps due to the prohibitive rates on the facility – and is now handing out dollars outright against US denominated securities. We wonder if the central bank uptake will be any higher than the repo facility aimed at US dealers and which is now redundant. Of course, when that fails the Fed can just offer to buy all central bank securities in what even reputable FX strategists now joke is a Fed on full tilt, and intent on buying out all foreign central banks.

And so, just as the financial situation was starting to stabilize, the Fed reminds everyone just how broken everything still is.

Fed launches ANOTHER temporary facility to provide $USD liquidity to foreign central banks (this time foreign central bank holdings of US Treasury’s can be exchanged for dollars).

At this rate, Fed is on course to buy out foreign central banks… and call it an M&A facility pic.twitter.com/iAXRCVoZS9— Viraj Patel (@VPatelFX) March 31, 2020

…click on the above link to read the rest of the article…

Recession “Tipping Point” Triggered: 10Y Yield Crashes Below 1.40%; Countdown To 0% Rates Begins

February 24, 2020

Recession “Tipping Point” Triggered: 10Y Yield Crashes Below 1.40%; Countdown To 0% Rates Begins

Last night, when the implied 10Y yield (Japan was closed) dropped to just 1 basis point above 1.40%, we said that we are literally this close from BofA’s “tipping point” for the 10Y Treasury, below which a recession is virtually assured according to the NY Fed’s recession probability indicator, and which also triggers a 12-18 month countdown to 0% rates.

Well, this morning, with risk assets crashing, the yield on the 10Y has sliced below the 1.40% “tipping point” like a hot knife through butter…

… and is now less than 1 basis point away from the all time low of 1.3579% hit on July 8, 2016.

Why does 1.40% matter again?

Because, as we explained yesterday, breaking below this “tipping point” level requires more than 50% probability priced for the Fed cutting rates back to 0%! This means that breaking 1.4% in an on-hold context for the Fed creates a significant inversion of the curve, pushes recession signals higher, and pressures a further inversion of the FF1/FF6 spread which we found in Pricing cuts ahead of the Fed to have no false positives for Fed cuts following a -30bp inversion (currently -16bp).

What this means in practical terms from a duration perspective is that “the market may gap lower on a break below 1.4% for the 10Y Treasury”, as this corresponds to phase transition higher in recession probabilities and a clear challenge to the on-hold Fed stance, “particularly as convexity flows add to what would likely be a broader risk-off move. “

…click on the above link to read the rest of the article…

Is Powell Playing Fed Games?

October 13, 2019

U.S. Federal Reserve chair Jerome Powell speaks during a discussion at the Economic Club in Washington on Jan. 10, 2019. (SAUL LOEB/AFP/Getty Images)

Is Powell Playing Fed Games?

The Federal Reserve will be adding assets to its balance sheet again, but Powell insists it’s not “quantitative easing”

The Federal Reserve will be adding assets to its balance sheet again, but Powell insists it’s not “quantitative easing”James GorrieWRITEROctober 10, 2019 Updated: October 10, 2019Share

Apparently, the “repo market” purchases by the Federal Reserve we discussed earlier this week —which don’t count as quantitative easing (QE)—were just the beginning of the new, non-quantitative easing but money printing period.

Fed “repos,” you may recall, are now necessary to boost weak overnight liquidity reserves of the big banks and don’t permanently expand the Fed’s balance sheet, unless they go on forever, in which case they would be QE. Now they are more of a short-term bail-out.

It’s Time for “Non-Quantitative Easing”

But in his Tuesday speech, Federal Reserve Chairman Jerome Powell explained that for the first time in five years, the “time is now upon us” for the Fed to resume buying U.S Treasury bills and bonds. That means that come November, the American economy will officially enter into another period of quantitative easing, you know, the Fed buying assets to expand its balance sheet.

Or not.

Typically, when the Federal Reserve buys Treasury assets, it’s because of weakness, either in the economy or in the financial system. A weakness that needs to be papered over by money printing, expanding the Fed’s balance sheet and bank reserves. Or the Fed buys other assets that nobody wants to buy at a decent price, like the purchases of mortgage backed securities (MBS) it conducted after the financial crisis.

…click on the above link to read the rest of the article…

“Panic At The Repo”: One Of The World’s Top Repo Experts Explains What Really Happened

October 8, 2019

“Panic At The Repo”: One Of The World’s Top Repo Experts Explains What Really Happened

Panic At The Repo

As a professional trader, I keep an eye out for the next panic or market crisis. Since the beginning of my career, there was a crash or panic every few years in one market or another. You try to think about what market is overbought. What market is in a bubble. What market just appeared on the cover of Time Magazine! Little did I ever imagine the Repo market would experience the next big panic. This is a market consisting of AAA-rated risk-free securities backed by the United States of America! How can there be a crisis in U.S. Treasury securities? We didn’t even make the cover of Time Magazine!

I write about the Repo market every day. As a service to our clients, I decided to put everything I know about the Repo market collapse down on paper. So here it is!

Modern Day Bank Run

We’ve seen the old pictures or films of people lining up outside of a bank to collect their deposits. Think of the Depression in the 1930s. Knowing that a bank can’t make good on all of their customers’ deposits means the first people to get their money are more likely to get their money. Period. Banks never keep all of their customers’ deposits as cash on hand. They invest those customers’ deposits by making loans – like a mortgage loan to a family to buy a home or loan to a business to help start a new venture. Banks invest in loans and borrow money through deposits. That also means they loan long-term and borrow short-term. Don’t worry, this is important later on.

…click on the above link to read the rest of the article…

Japanese Bond Crash, Margin Call Sends Shockwaves Around The Globe

October 1, 2019

Japanese Bond Crash, Margin Call Sends Shockwaves Around The Globe

For a dramatic preview of what will happen in a flash to all those record low interest rates without the backstop of central banks and ravenous pension fund, look no further than what happened in Japan overnight, where bond futures suffered the biggest one-day crash since August 2, 2016, sliding as much as 0.97 yen to 154.05, and triggering margin calls for investors after the worst 10-year debt auction in three years.

More ominously, once the rout started it quickly spread outside of Japan, because as yields jumped, the sell-off spilled into US Treasuries and European debt.

There were three things behind the swift collapse: the first catalyst was the Bank of Japan’s Monday decision to slash bond purchases in October for the four major maturity buckets in order to steepen the curve and avoid further flattening which Kuroda has repeatedly expressed concern about in the past; the BOJ had indicated it may even stop buying debt of more than 25 years. It also sought to anchor yields from the one-to-three year zone by raising purchases in a regular operation earlier in the day and lifting the purchase band for the sector in October.

“The BOJ is showing its clear intention to correct distortions in the curve through flexible adjustments in market operations,” said Mari Iwashita, chief market economist at Daiwa. “While cutting the lower end of purchases in bonds maturing over 25 years to zero looks shocking, the BOJ will probably cut buying in this zone slowly.”

“The BOJ’s operation change had a huge psychological impact,” said Eiji Dohke, chief bond strategist at SBI Securities in Tokyo. “Investors are reluctant to buy given the risk of the BOJ skipping a purchase.”

…click on the above link to read the rest of the article…

David Rosenberg: “These Are Truly Historic And Dangerous Times”

August 12, 2019

David Rosenberg: “These Are Truly Historic And Dangerous Times”

We are living in dangerous times.

Mostly, everyone I speak to lives in the here and now. They seem more interested in telling people how crazy cheap the stock market is and how crazy expensive the ‎Treasury market is, rather than trying to look at the current environment in a historical perspective. We are living through a period of history that will be written about in textbooks in years and decades to come, and the undertones are none too good.

Instead of telling people there is no recession, these bulls should be discussing why the markets are busy pricing one in. What do these pundits know that the markets don’t know? We have a bond market in which a quarter of the universe trades at a negative yield. The long bond yield has gone negative in Germany. More than half of the world’s bond market is trading below the Fed funds rate. Investment grade yields, on average, are below zero in the euro area.

This is completely abnormal because it reflects an abnormal economic, financial and political backdrop. Those who point to the stock market’s performance with glee, because of its V-shaped recovery, don’t bother telling you that in the past 12 months the total return is marginal in real terms and the best performing sectors are the ones you can only typically rely on in a deflationary recession – real estate, utilities and consumer staples.

One of the problems coming out of the most recent recession is that the global debt load is infinitely larger now than it was at the peak of that prior credit-bubble cycle. The world is awash in debt. Years of monetary intervention among the world’s central banks created artificial asset-price inflation and exacerbated wealth inequalities at the same time. Fiscal policy failed to arrest the increasingly wide income disparity, a global dilemma that has become acute in the United States.

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