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The Chinese Dumped Billions in US Treasuries in March

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Last month, we reported the Chinese had an ace up their sleeve they could play in an escalating trade war with the United States. They could start dumping US Treasuries.

Well, guess what?

China sold $2.5 billion of Treasuries in March.

According to the Financial Times, China wasn’t the only country dumping US debt.

China, the largest foreign holder of US Treasuries, joined other countries in selling long-term US government debt with a maturity over one year, having been a net buyer in January and February, according to data from the US Treasury. Japan, the second-largest holder, sold $8 billion, adding to sales in January and February of $2.1 billion and $14 billion, respectively. The largest sales came from the Cayman Islands, where many investment funds are domiciled, which shed $26.6 billion.”

China holds more US debt than any other country. It currently owns about $1.2 trillion in US Treasuries. If China starts aggressively dumping all of the debt on the market, interest rates will likely soar and the dollar would plunge.

This is not good news when the US government is trying to sell more than a trillion dollars of new treasuries to finance the massive spending bill along with tax cuts passed by the Republican Congress earlier this year.

We’ve already asked the question: who is going to buy all of the Treasuries the government needs to sell in order to fund its massive deficit? The US Treasury Department reportedly plans to auction off around $1.4 trillion in Treasuries this year, and the department expects that pace of borrowing to continue over the next several years. The US government depends heavily on three major buyers to finance its debt – China, Japan and the Federal Reserve. The Fed is trying to shrink its balance sheet, so it’s ostensibly not buying. If the Chinese and Japanese are getting out of the US debt market – and it sure looks like they are – how is Trump going to finance his bloated government?

There is already evidence of overabundance of supply in the bond market right now. That’s why we see prices falling and yields rising. On Tuesday, the yield in the 10-year pushed above 3%. The yield spread also narrowed this week. The 30-year closed at 3.209 on Tuesday. That gives us a yield spread between the 10-year and 30-year Treasury of just .13%. Narrowing yield curves generally signal increasing skepticism about the long-term outlook for economic growth and inflation.

During his most recent podcast, Peter Schiff said the bond market “looks horrific.” Yields on 10-year Treasuries appear to have broken out of a recent consolidation and could quickly move to 3.25% or even higher.

I think we’re going to see a faster acceleration of interest rates now that we have broken out of this bullish tart pattern – bullish on yields, bearish on prices.”

And of course, rising interest rates aren’t good news in a world economy built on debt.

In a recent interview, former director of the Office and Budget Management David Stockman said we’re heading for big trouble in the bond market with a glut of sellers and a shortage of buyers. In fiscal 2019, the Treasury Department plans to sell 1.2 trillion in new bonds. Meanwhile, the Fed will be trying to dump $600 billion in bonds into the same market. So, when you add it up, there is $1.8 trillion of homeless federal debt that is going to have to be absorbed.

It’s going to change the equation dramatically. Sooner or later, of course, it will be absorbed. Markets do clear. But not at 2.95% on the ten-year. They’re going to shoot through 3%, 3-and-a-half, through 4, and beyond. And as the yield gets driven up by supply and demand, and this $1.8 trillion tsunami of government debt looking for a home, it will ricochet through the entire financial system. In other words, the market is crazily overvalued today at 24 times earnings on the S&P 500. But that presumes interest rates can stay down in what I call the subbasement of history at 2.5% or a little higher indefinitely – permanently. And that’s just not going to happen.”

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