Foreign Demand for US Treasurys Takes Record Fall

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wbogle's picture
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Foreign Demand for US Treasurys Takes Record Fall

The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.

The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits.

Morpheus's picture
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Re: Foreign Demand for US Treasurys Takes Record Fall

Zerohedge has a few great analysis' of this.


Erik T.'s picture
Erik T.
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Re: Foreign Demand for US Treasurys Takes Record Fall

Here is an excellent ZeroHedge article that LemmonYellowSchwinn brought up in another thread:

I posted my own reaction to this article in the Something big just changed in Gold and Silver Markets thread, but here it is again:

In the ZeroHedge article, Tyler Durden wrote:

The most recent TIC data confirmed the Treasury's greatest nightmare: China is now dumping US bonds. In December China sold $34.2 billion of debt ($38.8 billion in Bills sold offset by $4.6 billion in Bonds purchased), lowering its total holdings $755.4 billion, the lowest since February 2009.

Whoa! This really confuses me.

If China had started dumping their holdings from the long end of the curve, I'd feel like I understood what was going on: They finally wised up to the absurdity of taking the interest rate risk inherent to holding long-dated debt owed by an insolvent borrower who has the ability to dilute the currency before paying it back. That would make perfect sense to me.

But China dumped 38.8b in bills and then purchased longer-dated bonds??? That almost sounds like they are trying to intentionally make their own situation worse! I cannot for the life of me comprehend what would motivate them to do such a thing. If we were talking about Joe Q. Public moving out the curve looking for higher yields, I would write it off to Joe Q. being too naive to understand the enormous interest rate risk such a move creates. But the Chinese government is clearly smarter than that.

The only rationale I can think of is that if I were China, I might want to keep my decision to start a massive, systematic, ongoing campaign of dumping U.S. treasury debt a secret for as long as possible, to avoid having the market react in a way that could compromise my remaining holdings. If that were my goal, I would probably sell the most liquid securities first, to avoid moving the market, then start dumping the long dated stuff just before the word got out as to what I was up to. By that logic, if they intended to eventually start dumping long-dated treasuries, they would be doing so by now.

Anyone have any further insight on why they would dump their highest quality (short dated) paper first? I can't believe it's about yield...



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