China gold“It would change the outlook on Treasuries quite a bit if you started to price in a fairly large liquidation of their reserves…”

 

Submitted by Tyler Durden:

On Tuesday evening, we asked what would happen if emerging markets joined China in dumping US Treasurys. For months we’ve documented the PBoC’s liquidation of its vast stack of US paper. Back in July for instance, we noted that China had dumped a record $143 billion in US Treasurys in three months via Belgium, leaving Goldman speechless for once. 

We followed all of this up this week by noting that thanks to the new FX regime (which, in theory anyway, should have required less intervention), China has likely sold somewhere on the order of $100 billion in US Treasurys in the past two weeks alone in open FX ops to steady the yuan. Put simply, as part of China’s devaluation and subsequent attempts to contain said devaluation, China has been purging an epic amount of Treasurys. 

But even as the cat was out of the bag for readers and even as, to mix colorful escape metaphors, the genie has been out of the bottle since mid-August for China which, thanks to a steadfast refusal to just float the yuan and be done with it, will have to continue selling USTs by the hundreds of billions, the world at large was slow to wake up to what China’s FX interventions actually implied until Wednesday when two things happened: i) Bloomberg, citing fixed income desks in New York, noted “substantial selling pressure” in long-term USTs emanating from somebody in the “Far East”, and ii) Bill Gross asked, in a tweet, if China was selling Treasurys.

Sure enough, on Thursday we got confirmation of what we’ve been detailing exhaustively for months. Here’s Bloomberg:

 
 

China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter.

 

Channels for such transactions include China selling directly, as well as through agents in Belgium and Switzerland, said one of the people, who declined to be identified as the information isn’t public. China has communicated with U.S. authorities about the sales,said another person. They didn’t reveal the size of the disposals.

 

The latest available Treasury data and estimates by strategists suggest that China controls $1.48 trillion of U.S. government debt, according to data compiled by Bloomberg. That includes about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts.

 


 

The PBOC has sold at least $106 billion of reserve assets in the last two weeks, including Treasuries, according to an estimate from Societe Generale SA. The figure was based on the bank’s calculation of how much liquidity will be added to China’s financial system through Tuesday’s reduction of interest rates and lenders’ reserve-requirement ratios. The assumption is that the central bank aims to replenish the funds it drained when it bought yuan to stabilize the currency.

Now that what has been glaringly obvious for at least six months has been given the official mainstream stamp of fact-based approval, the all-clear has been given for rampant speculation on what exactly this means for US monetary policy. Here’s Bloomberg again:

 
 

China selling Treasuries is “not a surprise, but possibly something which people haven’t fully priced in,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP.It would change the outlook on Treasuries quite a bit if you started to price in a fairly large liquidation of their reserves over the next six months or so as they manage the yuan to whatever level they have in mind.”

 

“By selling Treasuries to defend the renminbi, they’re preventing Treasury yields from going lower despite the fact that we’ve seen a sharp drop in the stock market,” David Woo, head of global rates and currencies research at Bank of America Corp., said on Bloomberg Television on Wednesday. “China has a direct impact on global markets through U.S. rates.”

As we discussed on Wednesday evening, we do, thanks to a review of the extant academic literature undertaken by Citi, have an idea of what foreign FX reserve liquidation means for USTs. “Suppose EM and developing countries, which hold $5491 bn in reserves, reduce holdings by 10% over one year – this amounts to 3.07% of US GDP and means 10yr Treasury yields rates rise by a mammoth 108bp ,” Citi said, in a note dated earlier this week. 

In other words, for every $500 billion in liquidated Chinese FX reserves, there’s an attendant 108bps worth of upward pressure on the 10Y. Bear in mind here that thanks to the threat of a looming Fed rate hike and a litany of other factors including plunging commodity prices and idiosyncratic political risks, EM currencies are in free fall which means that it’s not just China that’s in the process of liquidating USD assets. 

The clear takeaway is that there’s a substantial amount of upward pressure building for UST yields and that is a decisively undesirable situation for the Fed to find itself in going into September. On Wednesday we summed the situation up as follows: “one of the catalysts for the EM outflows is the looming Fed hike which, when taken together with the above, means that if the FOMC raises rates, they will almost surely accelerate the pressure on EM, triggering further FX reserve drawdowns (i.e. UST dumping), resulting in substantial upward pressure on yields and prompting an immediate policy reversal and perhaps even QE4.” 

Well now that China’s UST liquidation frenzy has reached a pace where it could no longer be swept under the rug and/or played down as inconsequential, and now that Bill Dudley has officially opened the door for “additional quantitative easing”, it would appear that the only way to prevent China and EM UST liquidation from, as Citi puts it, “choking off the US housing market,” and exerting a kind of forced tightening via the UST transmission channel, will be for the FOMC to usher in QE4.

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  1. China.   I would expect that they will do whats best for themselves.   Its a race to see whos going to wreck the race car first.    Paper is such a bad asset unless you sell the NY times on Park and Fifth, NYC.  and live in a subway tunnel.   Just own the future and review the past when in doubt.   It will make your hands stronger.   Better than GPS.   Be Cool also but not weak!

    • Bitcoin is surging because it has entered wave 3 technical rally. That being said it is currently running into resistance @ 675 so a pullback may be in order. In any case the wave 3 rally should not be over until we are pushing the old highs somewhere around 1200.

      EW3

    • @EW3

      u guys are totally asleep with bitcoin. it has been over an entire year since the revelation that bitcoin CANNOT SCALE. what this means is that the blocks are full. thats right, they are full right now. that means it might take an extremely long time to send your bitcoin anywhere…unless of course you pay a higher fee. what this means is that bitcoin cannot go mainstream because the block size would not be able to support it.

      bitcoin has risen do to MANIPULATION. the manipulation started blatantly, the bitcoin price shot up from $200.00 to $500.00 and then resettled at about $300.00 to $400.00.. now it is going up due to both manipulation and speculation of the halvening.

      why have they (who is they??) not fixed the BITCOIN CANNOT SCALE problem ?? the reason is because bitcoin is manipulated. you guys are being setup for a wealth transfer. they get people buying bitcoin at these pumped up prices thinking they are into the next big currency, and then bitcoin crashes due to the blockchain being broken. if this is not true, then why are they not fixing the blockchain problem ??

      for me it doesn’t matter. i have a bunch bitcoins in storage. i am well into the green. maybe they will fix blockchain at the last minute. in that case i am in good. if not, well i am have pms.

       

       

       

  2. The Amazing G7 Band was preparing to wow the crowd with their financial instruments when Xi clears his spit valve on the rest of the members before breaking into a solo rendition of “The World Turned Upside Down”.

    Now that’s how we Liquidate.

    • The Amazing G7 Band was preparing to wow the crowd with their financial instruments when Xi clears his spit valve on the rest of the members before breaking into a solo rendition of “The World Turned Upside Down”.

      Now that’s how we Liquidate.

       

      Very Creative

    • Who is buying? There is still huge demand for the USD – enough to absorb the selling pressure from China and other countries.  The bigger problem is China and the Yuan which is set to weaken significantly following their money printing to cover up bad debts – this could easily lead to food inflation and riots amongst the proletariat so the authorities are desperate to control the situation. Wealthy Chinese are pouring money into overseas property to avoid the impending currency devaluation they know is coming. The USD will strengthen significantly from here which will be symptomatic of the endgame as countries experiencing similar problems to China seek to escape their domestic currency devaluations by buying dollars. Sales of UST’s by CB’s will be dwarfed by the tidal wave of private money looking for a safe haven. PM’s will benefit as the USD approaches then reaches its climax and kills the U.S. economy.

  3. If we can take out 17.36  it should be clear sailing to 18.33 on silver.

    Bitcoin needs to take out 700 to continue higher. It will probably be stuck here for a while. Above 700 there are not many sellers so we should see some real action then.

     

    • @
      EW3
       

      bitcoin shmitcoin .. with the BLOCKCHAIN CANNOT SCALE issue.. your looking to lose a lot of money when it reverse.. bitcoin crashes a lot faster then it pumps .

    • Not really. The article is ten months old. What’s with this anyway? Been seeing quite a bit of this in regard to ZH/Tyler Durden posts. Why publish old articles as if they are new?

    • I guess reposting articles saves someone time in rehashing old crap. At some point they hope to be right – lord knows we’ve been reading the same things for years and we’ll have to be right at some point.

      As has been said by Rob Kirby, the ESF has soaked up all the selling and will be able to do so for an indeterminate timeframe into the future.

      Don’t let us get in the way of hysterical hyperbole designed to scare folks though.

    • “england to remain within eu”

      Let me add, “Whether or not they actually voted to leave”.  Those who count the votes WILL see to that.

    • @swc.blad  no they are not. if that were true bitcoin price would be much much higher. u wouldnt even be able to buy a full bitcoin if what u said were true. u would only be able to buy fractions of a bitcoin.

  4. Was that ” take down ” vaporised ?………just saying.

    Is this the action we have been waiting for ?

    Or are they just playng with our emotions again ?[ Ramp it up, only to disappoint] ?

    While Gold { and silver } remains stable , we may not………but we should.

  5. @skiddypants

    Silver and gold are like Lucy and the prom queen. All full of promises until they yank the football away.  Behind them is all the malevolence and wickedness of those who control the metals.  We can remain stable long than they can remain pathological

  6. I must admit that I don’t know a thing about bitcoin but I find it quite odd (and a doggone shame) that a made up out of thin air digital currency – bitcoin – is worth over forty times more than an ounce of physical silver and over half as much as a half ounce of physical gold. I thought the only true wealth was silver and gold? I guess in 2011-2012 I should have put my money in bitcoin instead of silver but I went by the old saying; ” if you don’t hold it you don’t own it.” Plus the fact that the US Gov could outlaw online currency with the stroke of a pen as they did gold in 1933 – could they not? Also, isn’t the U.S. dollar produced the same way as bitcoin, something from nothing?

    • @INat38
       

      its manipulated thats why.. it was probably supposed to be the usa’s replacement for the usd.. we’re being all innovative.. but bitcoin has several problems.

      this pump is halvening hype.. as soon as halvening passes there is good possibility this will crash right back down. it cannot be used as a mainstream currency. they would have to fix the scaling problem. they are not fixing it for a reason. up to u to determine why they are not fixing the lingering blockchain issue. and.. decide if it is worth the risk to buy bitcoins at these pumped prices.

    • The banks print paper gold and paper silver in the futures exchanges.  They have not figured out how to manipulate bitcoin without buying actual bitcoin.  Gold and silver prices would be soaring if the banks needed to buy physical metals to manipulate the prices. Bitcoin, gold and silver all require massive quanities of energy to mine.  US dollars do not require massive quanities of energy to produce.  This is why Bitcoin is more like physical gold than dollar.  Paper gold, paper silver, USdollar – thin air.  Physical gold, physical silver, bitcoin – not thin air.

  7. i’m with you. Wish i owned some btc, find it fascinating, hoping pm’s follow the trend. It will be for different reasons though. If The chinese are liquidating, to btc, pushing it up, they can then spend all that on metals after all that appreciation within btc..Kind of brilliant. That way, they make a lot more than just buying pm’s directly with the proceeds.

  8. An article yesterday talked about 100 bankers meeting in NY to set up a new system called CHAIN.  It’s the banker’s counter to the blockchain system used by BTC.    The only problem is that this newest ‘cashless’ system is controlled by the bankers and while it’s pretty frictionless and low cost, it’s also available to the government. They’ll be able to check anytime as to what is going on in any CHAIN account

    • @
      AGXIIK s
      not only that, they can control those CHAIN accounts. they can blacklist them too. u owe on a loan ?? it will be taken directly from ur blockchain account regardless of ur personal situation. you support the second amendments ?? u just got blockchain blacklisted. CHAIN will make it easier to make sure you pay your bank bail-in taxes too.

       

       

  9. that’s kind of silly imo opinion because bitcoin is defined, advertised, as being “outside the system”. One of it’s many attractions i would think,  and also  that privacy factor, like cash is privacy. If the system co-ops a blockchain technology – i think everyone opts to stick with original btc, assuming it really is outside the system.

  10. Who is buying these Treasuries that China has been dumping? Answer…The Cayman Islands are fronting for the Fed and are now the world’s third largest holder of U.S. Treasuries. Cayman, a country the size of Flagstaff, Az is #3. Do you believe it!

  11. China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter.”

    In other words, they tank the yuan two weeks ago, but are now selling U.S. Treasuries to raise money to buy them back to boost the price.  Is it a sort of Chinese fire drill or am I missing something?

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