With the Dow Jones down around 10 percent in the past three months and China's stock market going through a big and inevitable correction, more news of ill portent for the U.S. dollar and economy this week, from 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… Two-year Treasuries erased an earlier advance, with their yield little changed at 0.67 percent as of 11 a.m. in London. It fell as much as two basis points. The 10-year yield declined three basis points to 2.15 percent, near to its average for the past month. Chinese sales of U.S. government debt may have kept yields from falling this month as a selloff in global stocks prompted investors to favor the safest assets… 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… "Strategically, it probably has been China's intention to find the right time to lighten up its excessive accumulation of U.S. Treasuries," he said.
Lisa Abromowitz on how those Chinese actions affect some standard "other things equal" market logic that should have made treasuries a safe haven right now:
Treasuries, often a haven for investors fleeing riskier assets, actually lost value after China rocked markets by devaluing its currency to stimulate growth. Longer-term U.S. government Treasuries have declined 2.3 percent since Aug. 17, according to Bank of America Merrill Lynch index data. This doesn't make sense from a purely economic standpoint, since the prospect of slower growth should make these securities more attractive, not less. But there's another force at play. China, the world's second-biggest economy that's accumulated trillions of dollars of foreign assets since 2003, is now selling some of those securities, including Treasuries…
Joe Weisenthal says this week's event shows that apocalyptic fears about how the Chinese could use their vast Treasury holdings to harm us are bunk:
China hasn't been adding to its U.S. Treasury holdings for a long time…. The bottom line is that we haven't seen upward pressure on U.S. rates (at all) during this selling. If anything, U.S. borrowing costs continue to confound economists, who always think higher rates are right around the corner. …. There's just zero evidence that China reducing its holdings of U.S. debt is creating any real pressure on anything. In fact, even if China really wanted to dump U.S. debt for the sole purpose of causing economic harm, there just aren't any alternative assets that are as deep or as liquid.
The folks at Zerohedge, the most entertaining and spine-chilling source of regular "the whole international fiat currency house of cards is collapsing" news and commentary (who, yes, see destruction in nearly all portents) were ahead of the curve in warning about the Chinese T-dump and see QE4's inevitability:
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.
My advice remains the same: buy low, sell high, whatever, just so long as you're happy. (Required legal fine print: past guarantees are no future of return performance. Not a licensed financial adviser.)
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