Look at who is dumping US dollars and treasuries, plus some other surprises.
Large Foreign Holders Dumping US Treasuries
July 19 (King World News) – Peter Boockvar: Maybe we’re on the cusp of a global (outside of Japan) rate tweaking cycle instead of a rate cutting cycle? Post the ECB meeting where right after it ended and when all the leaks from the meeting flow out, Bloomberg News reported that “ECB policymakers are increasingly wondering if they may only be able to cut interest rates once more this year, according to people familiar with the matter. With inflation pressures still lingering, officials are becoming less confident that a path for two further reductions is realistic, and don’t want investors to assume that a move in September is a done deal, said the people, who declined to be identified because deliberations are private.”
That said, the swaps market is currently fully pricing in two more rate cuts and members Villeroy and Simkus today said they agreed with that assumption. Bonds yields are little changed for a 2nd day and same with the euro so nothing really market moving from the ECB meeting.
While foreigners bought a net $46b of US notes and bonds in May according to last night’s TIC data, it seems that Japan might have sold some Treasuries in order to fund their FX intervention. After selling a net $37.5b in April, they sold another $22b in Japan, taking their total holdings to $1.1 trillion, still the number one spot but that is the least since November.
China sold $2.4b worth of Treasuries and their holdings are hovering around the lowest since 2009 and not a coincidence that the holdings really went south soon after Russian invaded Ukraine and the EU and US froze half of Russia’s central bank reserves.
As Usual, Here Comes The Mystery Cayman Islands Buyer
Purchases coming from the Cayman Islands led the buying, $17.1b worth, and are typically hedge funds domiciled there. Canada added $16.3b and the UK $13.1b. The UK can be anyone, including banks, hedge funds and countries using a UK bank to transact.
Bottom line, while ‘foreigners’ in totality continue to purchase US Treasuries, the % ownership of them continues to fall. They own about 30% of US marketable debt vs 50% 10 years ago (see page 2 which is page 5 of report, https://sgp.fas.org/crs/misc/RS22331.pdf). As part of this, the % of foreign reserves that hold US dollars as of March sits at the lowest level since 1996 with gold picking up some of that slack.
Foreign Holdings Of US Dollars As % Of Reserves Was Lower In The 1990s
Rates To Remain High
Alasdair Macleod: Jay Powell has signalled that inflation is moving sustainably towards the Fed’s 2% target and that the jobs market has cooled down. Hopes for an interest rate cut are rising, but the Fed is being misled badly…
Undoubtedly, market values everywhere are predicated on the Fed cutting rates. To a limited extent, this could become a self-fulfilling prophecy. So far, the effect on the 10-year US Treasury Note, which sets the valuation tone for all financial assets, has been to reduce its yield in recent months from 4.7% to under 4.2% currently. I have pencilled in a potential support line at 4.08% (the pecked line).
While there is little evidence that this line will provide a floor to the yield, taking it as a reference point it should be noted that an anticipated cut in interest rates in September is mostly discounted. But because Powell appears to believe that inflation is coming under control, we should question this assumption. If Powell is wrong, then at best it will be only one cut at most before the uptrend in bond yields continues.
© 2024 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. However, linking directly to the articles is permitted and encouraged.
