China is divesting from US treasuries and increasing its gold reserves.
Summary:
In February, the world's second-largest
economy sold USD 22.7 billion worth of US treasury bills, bringing its total
holdings to USD 775 billion by the end of that month, as reported by the US
Treasury Department and cited by the South China Morning Post. Meanwhile,
China's foreign exchange reserves, the world's largest, stood at USD 3.2457
trillion last month, according to state-run Xinhua news agency.
In February,
China decreased its holdings of U.S. Treasuries by another $22.7 billion, as
reported by the latest Federal Reserve data. This reduction brought China's
total holdings down to $775 billion. Despite this decline, China still stands
as the second-largest foreign holder of U.S. debt, although the U.K. is poised
to surpass China and claim the second spot if the current trend persists.
Japan
remains the largest foreign creditor to the U.S., with holdings totaling $1.17
trillion in Treasuries. Following Japan, the U.K. ranks third, holding $700.8
billion in U.S. Treasuries.
Over the past few years, China has been gradually divesting from U.S. debt. From its peak of around $1.1 trillion in 2021, Chinese holdings have steadily declined. In October, Chinese investment in U.S. debt reached a 14-year low.
The big problem
for the US treasury:
China's decision to offload its Treasury holdings highlights a significant concern for the U.S. Treasury. With the federal government consistently running substantial deficits month after month, the question arises: If China and other nations continue to steer clear of U.S. debt, who will finance this ongoing borrowing binge?
Approximately
one-third of the market for U.S. Treasuries is comprised of foreign investors.
While one might argue that there is still ample capacity within the domestic
market, the issue arises when considering that the largest domestic U.S.
bondholder is also absent from the market.
That is the Federal Reserve (FED).
Indeed, the
Federal Reserve stands as the largest holder of U.S. bonds. By the close of
2022, the Fed's ownership accounted for 35 percent of all domestically held
Treasuries, amounting to over $6 trillion in Treasury holdings.
The Fed
typically maintains a significant presence in the bond market. Through its
purchases and retention of U.S. bonds, the central bank generates artificial
demand, elevating prices beyond their natural levels and thus suppressing
yields. Consequently, this scenario enables the U.S. government to access
greater borrowing capacity at lower interest rates than it would otherwise
attain.
The current
issue lies in the Federal Reserve's absence from the market. With the central
bank implementing a quantitative tightening policy aimed at curbing price
inflation, it is allowing Treasuries to gradually roll off its balance sheet.
Given this
circumstance, if the largest player in the domestic Treasury market and the
second-largest player in the foreign Treasury market are both selling bonds,
the question arises: Who will absorb this surplus, in addition to the new debt
continuously issued by the U.S. Treasury each month?
This contributes to the ongoing rise in Treasury yields, despite expectations of a Federal Reserve rate cut. This poses a significant issue, particularly considering that halfway through fiscal 2024, the U.S. government has already allocated $522.02 billion toward interest payments. This marks a 35.9 percent surge compared to the same period in fiscal 2023, with only Social Security expenses surpassing it in spending.
It appears increasingly likely that the Federal Reserve will need to re-enter the Treasury market with another round of quantitative easing to absorb some of the federal government's debt. However, this approach is inflationary, implying that ultimately, the burden will fall on individuals through a continuous rise in inflation, effectively resulting in an inflation tax.
About RR
Finance:
An
integrated financial services group, offering a wide range of financial
products and services to corporates, institutions, high-net-worth individuals, and retail investors.
Explore a wide range of investment opportunities with RR Finance: https://www.rrfinance.com/
Source – https://www.fxstreet.com/analysis/china-is-dumping-us-treasuries-and-buying-gold-202404212302
Comments
Post a Comment