econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 29 December 2016

Why Are Foreign Nations Dumping US Treasuries?

Written by , Difference Group

Recently, foreign holders of US treasuries have been dumping their holdings more and at record pace. Optimists see it as a temporary fluctuation. Realists warn about structural change.

usdebtdump380x213.

According to US Treasury data, major foreign holders of US treasury securities have been reducing their holdings by almost $250 billion since March. The pace of dumping has intensified with some $200 billion reduced in just past two months.

In the process, Japan has surpassed China as the major holder of US treasuries for the first time in nearly two years. While the mainland still has some $1,116 billion in US treasuries, it has reduced its holdings by $130 billion in just a year, along with Saudi Arabia ($18 bn), Russia ($13 bn), Turkey ($9 bn), and Norway ($18 bn).

What’s going on?

Temporary glitch or structural change

While some argue that the reductions by foreign holders only reflect seasonal fluctuations, this may no longer be true. Until recently, foreign holdings of US treasuries climbed steadily peaking at $6.280 trillion last June. Since then, they have declined by almost 4 percent (or $240 billion).

Indeed, some observers argue that US treasuries have never been sold so aggressively over a 12-month period.

The most benign scenario is that foreign holdings of US treasuries have plateaued since June 2014 when they first crossed the $6 trillion milestone. The less-benign scenario is that these holdings began a decline last summer - when President-elect Trump won the Republican nomination.

The plunge of US treasuries to less than $6 trillion by January 2017 - especially if the rapid pace of dumping will prevail - would further reinforce such perceptions.

There are obvious reasons for some foreign countries to reduce their holdings. China has been selling holdings to defuse sharper devaluation of the renminbi. Other major sellers - Saudi Arabia, Russia and Norway - are oil exporters, which have sold US treasuries to gain funds to offset the drop in dollar-denominated oil prices and to contain the deterioration of budget deficits.

Some sellers - Saudi Arabia, Russia and Turkey - also struggle with geopolitical challenges that are forcing them to reassess the weight of the US dollar and US ties in their foreign economic relations.

Finally, all foreign holders are concerned that the Trump administration will soon initiate its fiscal stimulus, which could almost certainly translate to a major spike in future debt issuance by the US.

Trump’s debt tornado, Fed’s hikes and treasuries

The net effect of foreign selling of US treasuries, especially if it does not slow in the next few months, looks increasingly like the kind of foreign liquidation that Washington has feared for years. Moreover, it may push the Fed into a corner.

If Trump will trigger a $1 trillion debt tornado at a moment, when Fed chief Yellen and her board seek to accelerate tightening - in addition to recent 25 basis points hike, three comparable rate increases in 2017 - Trump can no longer rely on the Fed to ease and thus to monetize the debt issuance.

While Trump has said that he would like to replace Yellen because she is not a Republican, her term will not end until February 2018. Last June, Trump characterized Yellen as "a low interest rate person," like himself. "If we raise interest rates and if the dollar starts getting too strong, we're going to have some major problems," he warned. That shift is now a reality.

Moreover, as Trump is about to dramatically polarize Washington, America and the world community, he will force Yellen to draw contingency plans (including halting rate hikes, initiating a fourth wave of quantitative easing, and so on).

If Trump takes that path, he may incentivize foreign holders of US treasuries and the international community to reassess the weight of US treasuries and US dollar in the world economy even faster than anticipated.


An earlier, slightly shorter version of this commentary was published by Shanghai Daily on 20 December 2016.


>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Opinion Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Opinion


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Is Free Trade Harming the Economy?
Bank of England Endorses Post-Keynesian Endogenous Money Theory
News Blog
More Buck For The Chuck
More About What's Going On In Retail
Your Dog Has A Better Memory Than A Chimpanzee
Where Shadow Economies Are Well Established
What We Read Today 20 February 2017
Successful SpaceX Launch &amp; Landing Of Falcon 9 + Dragon CRS-10 Mission To The ISS (2017-02-19)
Investor Bulletin: Savings And Investing Basics For Military Personnel
Does Growing Mismeasurement Explain Disappointing Growth?
Why Does Economic Growth Keep Slowing Down?
Houses As ATMs No Longer - Part Three Of Five
Infographic Of The Day: What It's Like To Live On Minimum Wage
Early Headlines: Asia Stocks Up, Dollar, Oil Up, Gold Down, Investors Bet Higher Oil, Kraft-Unilever Deal Off, French Election Turmoil, Trump Worries Germans More Than Putin, Japan Imports Surge And More
Most Read Articles Last Week Ending 18 February
Investing Blog
Market And Sector Analysis 19 February 2017
Dollar Looks To Head Higher
Opinion Blog
Fascism Defined And Described By Oswald Mosley
Charity Is Not How We Solve Poverty
Precious Metals Blog
Deflation And Gold: A Contrarian View
Live Markets
20Feb2017 Pre-Market Commentary: US Markets Closed Today In Observance Of The Presidents Day Holiday, US Dollar Slips, European Stocks Rise
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved