Who is buying Treasuries in a backdrop of negative real yields, where the dollar index is struggling to rise above 100, and inflation fears are mounting?
JPMorgan’s Jamie Dimon said he would not touch US Treasuries with a “10-foot pole” because he thinks they are a poor investment.
But the latest Treasury Internet Capital (TIC) indicates that investors, particularly from Asia are still keen on buying Treasuries
Asian investors remain the largest holders of the US national debt, which ballooned by over $5 trillion since early March 2020, to $28.4 trillion.
The Treasury Department released its TIC report in August, which tracks foreign holdings of Treasury securities by country through June enables us to piece together the puzzle of who is buying Treasuries in a negative real yielding environment.
The Fed’s balance sheet is also another place to go to find answers to who is buying Treasuries
The Fed’s bank data shows the holdings by US government entities, such as government pension funds (per the Treasury Department’s data); and holdings by other US entities, such as mutual funds and pensions funds (per data from SIFMA).
Foreign creditors continue to play an important albeit fading role in buying Treasuries.
Darren Winters likes to keep an eye on which countries are buying US Treasuries because it gives him a heads-up on geopolitics. Capital flows trumps political and diplomatic speak, after all, words are cheap and can sometimes be deceptive. Capital flows do not lie, they will tell you the real story.
Japan continues to be the largest foreign buyer of US Treasuries
Japan’s holdings since March 2020 have ticked up less than $5 billion, to $1.28 trillion at the end of June, and it continues to remain a stable buyer of US Treasuries.
China is the second-largest foreign buyer of Treasuries
In June, its holdings fell by $16 billion from the prior month to $1.06 trillion bouncing into the multi-year low of $1.05 trillion achieved during peak capital flight in December 2016. Since March 2020, China’s holdings fell by $21 billion.
China is looking to build its dominance in the Pacific which reflects its economic power in Asia.
But the rise of China is intimidating other Asian countries, particularly Japan.
The US is bolstering its military muscle in the Pacific, which could be triggering a buying freeze in US Treasuries in the Pacific, particularly Japan and China
The US could be playing the role of Godfather, where countries pay protection money, they buy US Treasuries, in exchange for US security, US guns for hire.
Why is China buying Treasuries with an exposure of over $1 trillion with negative real yields?
China, the second-largest foreign holder of US Treasuries could be motivated by geopolitical rather than financial reasons.
Ancient Chinese military strategist, Sun Tzu, wrote a book entitled Art of War, where victory is achieved without fighting.
The US is heavily indebted and desperately needs foreign buyers for its paper, Treasuries
So, Japan and China are in a sit down with the US, the Godfather. Will the US agree to China’s increasing dominance in the Pacific if China outbids Japan in the buying of Treasuries?
In a world where money buys everything will it also buy US foreign policy?
This is why a strong military is important, particularly if the country plays the role of a global cop. Those countries threatened by the rise of China want to be on the right side of a big brother even if it means buying the debt at a loss.
The latest TIC Report confirms that Treasuries in June climbed to their highest since February 2020
Treasury Department data showed on Monday, in what analysts described as broad-based demand that helped drive yields lower for the month.
Foreign holders held $7.202 trillion in Treasuries, up from $7.135 trillion in May Foreign holdings of Treasuries in June were the second largest on record. The month also saw about $67 billion in Treasury purchases, the biggest monthly increase in a year.
The UK’s city of London financial center held $453 billion Treasuries.
But some of the largest additions to foreign Treasury holdings were in custodian countries such as Ireland, Cayman Islands, and Luxembourg, which suggest that buying was pretty broad-based, according to Gennadiy Goldberg, senior US rates strategist, at TD Securities in New York.
This is consistent with the rally in Treasuries during the month. You had bought in May and June, but it looks like in June, it had the effect of driving rates lower” said the analyst.
US benchmark 10-year Treasury yields started June with a yield of 1.6062%, falling 14 basis points to 1.4680% by the end of that month.
The Federal Reserve was also busy buying Treasuries as it increased its holdings by $241 billion in Q2 and by $2.6 trillion since March 2020, more than doubling its holdings in 16 months
US commercial banks also increased their holdings of Treasuries by $96 billion in Q2 and by $424 billion since March 2020, to a record $1.4 trillion, according to Federal Reserve data on bank balance sheets. They now hold 4.9% of the Incredibly Spiking US National Debt:
Meanwhile, US Pension Funds trimmed their holdings in Q1 from the peak in Q4 2020, to $3.1 trillion, according to SIFMA.
But for those of you with exposure to Chinese assets here is the takeaway of the piece;
Until China holds over one trillion US dollars in Treasuries, it is business as usual irrespective of what you hear or read in mainstream news.
But should China start dumping Treasuries in a meaningful way then Darren Winters says he would reduce exposure to Chinese assets. Since March 2020, China’s holdings fell by $21 billion, which is a relatively modest drop, bearing in mind China still holds $1.06 trillion.
Two tribes on the brink of war do not trade each other’s debt.
NASDAQ Golden Dragon China Index looks interesting. See the latest list of foreign transactions in Treasuries here.