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Who Is Buying US Treasuries?

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The Japanese and Chinese aren’t buying US Treasuries. In fact, both countries reduced their holdings in April.

According to the US Treasury Department, the Japanese disposed of $12.3 billion in US debt. Meanwhile, Chinese Treasury holdings fell by $5.8 billion.

This could be a troubling development for the US government as it scrambles to fund its massive deficits and ever-growing debt.

Earlier this year, we asked the question: who is going to buy all of this US debt? The US Treasury Department plans to auction off around $1.4 trillion in Treasuries this year. And it won’t end there. The department expects that pace of borrowing to continue over the next several years. That’s a lot of bonds. Who will buy them? Because the biggest purchasers of US debt aren’t in a buying mood. In fact, they appear to be selling.

The Japanese rank as the second-largest holder of US Treasuries, but they’ve been systematically selling. Over the past six months, the Japanese have shed $63 billion in US debt. Since July 2016, they have reduced Treasury holdings by $123 billion.

The Chinese haven’t been dumping Treasuries at the same rate as the Japanese – at least not until recently – but they haven’t been buying either. China’s holdings have remained within the same range since August 2017.

But as the trade war between the US and China continues to intensify, China could use its holdings of US debt as a weapon. The Chinese can’t out-tariff Trump. The US imports far more products than the Chinese. But China does have an ace up its sleeve. They could start more aggressively selling US Treasuries. If China starts dumping large amounts of debt on the market, interest rates will likely soar and the dollar would plunge.

As Wolf Street noted, you can more clearly see that Japan and China are less eager to service US debt when you look at it in terms of the percentage of the US gross national debt.

There are two reasons for the steady decline.

  1. The US gross national debt has soared.
  2. The holdings of China and Japan have fallen over the past two years.

The Federal Reserve is another big player in the US Treasury market. The central bank holds about $2.39 trillion on federal debt, much of it purchased over the last decade through its QE programs. But the Fed isn’t buying right now either. Its Treasury holdings fell by $70 billion from the beginning of its QE unwind last fall through April.

And on an interesting side-note, the Russians cut its Treasury holdings in half in April, selling off $47.4 billion of its $96.1 billion in US debt.

As Wolf Street points out, the Russians don’t hold very much US debt, so their sell-off isn’t particularly meaningful in the big scheme of things. But imagine if China or Japan were to hold a similar fire sale. That would be headline news – and not the good kind.

So, if the big three – China, Japan and the Fed – aren’t buying US bonds, who is?

According to Wolf Street, “Mostly American institutional and individual investors, directly and indirectly, through bond funds, pension funds, and other ways.”

The question is how much of the load can these investors absorb? And how high will interest rates have to climb in order to keep them buying? Keep in mind, rising interest rates don’t just impact bond yields. On the flip-side, debtors are paying more to service their debts. That means leveraged companies and consumers with massive credit card balances. That’s not good news in a world drowning in debt.

The bottom line is interest rates will most likely continue to rise. It’s a simple supply and demand calculation. The Treasury Department has to sell more than a trillion dollars in bonds. Nobody wants to buy. Interest rates will go up to entice more buyers into the market. The Sovereign Man summed up the implications in an article last winter. It’s worth repeating.

Make no mistake: higher interest rates will have an enormous impact on just about EVERYTHING. Many major asset prices tend to fall when interest rates rise. Rising rates mean that it costs more money for companies to borrow, reducing their leverage and overall profitability. So stock prices typically fall. It’s also important to note that, over the last several years when interest rates were basically ZERO, companies borrowed vast sums of money at almost no cost to buy back their own stock. They were essentially using record low interest rates to artificially inflate their share prices. Those days are rapidly coming to an end.”

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