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2018-01-10

Apocalypse 2016: China Sold U.S. Treasuries

Financial markets are in a minor tizzy because China said it might stop purchasing U.S. treasuries! Wow! The dollar is screwed! Except, they already sold U.S. Treasuries and "halted purchases" in recent years.

Bloomberg: China Weighs Slowing or Halting Purchases of U.S. Treasuries
Officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries, according to people familiar with the matter. Benchmark bonds reversed earlier gains on the news, with the yield on 10-year Treasuries climbing for a fifth day.

China holds the world’s largest foreign-exchange reserves, at $3.1 trillion, and regularly assesses its strategy for investing them. It isn’t clear whether the recommendations of the officials have been adopted. The market for U.S. government bonds is becoming less attractive relative to other assets, and trade tensions with the U.S. may provide a reason to slow or stop buying American debt, the thinking of these officials goes, according to the people, who asked not to be named as they aren’t allowed to discuss the matter publicly. China’s State Administration of Foreign Exchange didn’t immediately reply to a fax seeking comment on the matter.
Since the U.S. began aggressively using financial assets and Treasury holdings as political weapons, it makes sense for any state to reduce Treasury holdings and diversify into other assets including gold. Particularly for competitor states such as Russia and China who could run into direct conflict with the United States. If this is a surprise to anyone, they are not paying attention to global politics. Long-term, the U.S. dollar will lose its status as sole reserve currency, if it doesn't lose reserve status entirely. The last major bull rally in the dollar is a trading opportunity, not a buy-and-hold strategy.

March 2017, ZH: China Is Again Selling US Treasuries As Foreign Central Banks Liquidate $45BN
After December's brief dead cat bounce, in which foreign central banks bought $18.6 billion in US Treasuries, breaking a streak of 12 consecutive months of selling, in January they resumed their liquidation. According to the just released TIC data, foreign official institutions, which includes mostly central banks, but also sovereign wealth funds and various other official entities, sold another $44.9 billion in Treasuries, in line with the aggressive selling seen for most of 2016.
Huh, but why would China be selling?

CNN: China is no longer the biggest foreign holder of U.S. debt
Beijing has been dumping U.S. government debt to prop up its currency. China uses the dollars it gets from selling U.S. Treasuries to buy the yuan, which has sunk to an 8-year low as the world's second largest economy slows.

January 2009, NYTimes: China Losing Taste for Debt From U.S.

Yesterday, the PBoC changed its fixing policy, a move that I interpret as signaling a bottom in the USD. Today's news is in the same vein. I don't think the PBoC is this cynical, but it also provides a modicum of CYA if they do start selling Treasuries.

Finally, if financial markets are getting nervous about something that isn't news, it may be a sign that confidence has peaked.

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