Wednesday, October 17, 2018

August saw both China and Japan dump Treasuries which adds another catalyst to rising bond rates

One of the primary things that has kept inflation from raging across the U.S. economy over the past decade as the Fed conducted a historic amount of monetary expansion has been America's reliance upon foreign entities being willing to purchase dollars and dollar based assets.  But unfortunately for the U.S., the days of mindless acceptance of the dollar by nations has crossed the Rubicon.

Besides Russia dumping the majority of their dollar reserves since the beginning of the year, a growing number of countries have simply chosen to stop their accumulation of dollars which has forced the Fed to often have to buy its own bond issuance to protect the market.  And now we are finding out that the two biggest holders of Treasuries are becoming net sellers as both China and Japan sold off dollars in August for the first time in several months.

China and Japan – the two main holders of the US Treasury securities – have trimmed their ownership of notes and bonds in August, according to the latest figures from the US Treasury Department, released on Tuesday. 
China’s holdings of US sovereign debt dropped to $1.165 trillion in August, from $1.171 trillion in July, marking the third consecutive month of declines as the world’s second-largest economy bolsters its national currency amid trade tensions with the US. China remains the biggest foreign holder of US Treasuries, followed by long-time US ally Japan. 
Tokyo cut its holdings of US securities to $1.029 trillion in August, the lowest since October 2011. In July, Japan’s holdings were at $1.035 trillion. According to the latest figures from the country’s Ministry of Finance, Japanese investors opted to buy British debt in August, selling US and German bonds. Japan reportedly liquidated a net $5.6 billion worth of debt. 
Liquidating US Treasuries, one of the world's most actively-traded financial assets, has recently become a trend among major holders. Russia dumped 84 percent of its holdings this year, with its remaining holdings as of June totaling just $14.9 billion. With relations between Moscow and Washington at their lowest point in decades, the Central Bank of Russia explained the decision was based on financial, economic and geopolitical risks. – Russia Today
As an ever growing number of nations begin to reject the dollar as a medium of exchange for trade, holding dollars in reserve is rapidly becoming unnecessary.  And this de-dollarization policy is certainly creating a huge problem now in the bond markets, and a major reason for the dangerous spike in yields which could prove disastrous for the U.S. and its ability to cover and expand their debt requirements.

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