The wholesale liquidation of US Treasuries continued in November, when according to the just released TIC data, foreign central banks sold another $936 million in US paper in November 2016, which due to an offset of $892 million in buying one year ago, means that for the 12 month period ended November, foreign central banks have now sold a new all time high of $405 million in the past 12 months, up from a record $403 million in LTM sales as of one month ago.
Where did the selling come from?
While Japan sold about $23 billion in November, its fourth month of consecutive selling, it was China which drove the selloff, dumping a whopping $66.4 billion in US Treasuries in its 6th consecutive monthly sale of US paper, and the biggest monthly selloff since December 2011. The monthly sale also brings China’s total Treasury holdings to the lowest level since early 2010.
When combining China’s with the Belgian holdings, an offshore center used by China to mask its purchases (and over the past two years sales) the correlation between combined Treasury holdings and China’s total reserves suggests that this is where the action is at. And considering the reduction in reserves has continued into December, it is safe to assume that China continued to sell US paper to match the reduction of its foreign reserves which as a reminder declined, officially, by another $41 billion last month.
Curiously, reversing its recent trend, Saudi Arabia bought just over $3 billion in Treasury, and has added $10.7 billion in US paper in the past 2 months, the most since July 2006.
But most troubling was neither Japan’s, nor China’s selling, but all foreign holders of US Treasurys combined, which sold $70.8 billion, the most in one month ever, bringing their total holdings to 3.771 trillion, far below the $4.117 trillion held one year ago. On an annual basis, the drop was -8.4%, the biggest decline on record (don’t blame Russia: “Putin” actually bought $12 billion in US paper in November).
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As we pointed out one month ago, what has become increasingly obvious is that both foreign central banks, sovereign wealth funds, reserve managers, and virtually every other official institution in possession of US paper, is liquidating their holdings at a troubling pace, something which in light of the recent surge in yields, appears to have been a prudent move.
In some cases, like China, this is to offset devaluation pressure; in others such as various petroleum exporting nations – but curiously not Saudi Arabia in the past 2 months – it is to provide the funds needed to offset the drop in the petrodollar, and to backstop the country’s soaring budget deficit. In all cases, it may suggest concerns about a spike in future debt issuance by the US, especially now under the pro-fiscal stimulus Trump administration.
Who are they selling to? The answer, at least until August, was private demand, in other words just like in the stock market the retail investor is the final bagholder, so when it comes to US Treasuries, “private investors” both foreign and domestic are soaking up hundreds of billions in central bank holdings. As we said two months ago when we observed this great rotation in Treasuries out of official holders into private hands, “we wonder if they would [keep buying] knowing who is selling to them.” Well, svereal months ago this changed, and after private investors had been happily snapping up bonds for 4 straight months, in September “other foreign investors” sold a whopping $31 billion, bringing the total outflow between public and private foreign holdings to $76.6 billion, the second highest number on record. In October, while foreign official entities sold another $45 billion, at least the pace of selling by private entities moderated somewhat, to “only” $18.3 billion. However, in November the trend appears to have reversed again, and private foreign buyers picked up some $731 million. Maybe they know something central banks do not?
Meanwhile, while just five months ago yields had tumbled to near all time lows, suddenly the picture is inverted, and long-yields are once again rising on concerns that not only could the ECB and the BOJ soon taper their purchases of the long end, but that Donald Trump is about to unleash a $1 trillion debt tsunami at a time when the Fed will not be available to monetize it, now that the Fed is again hiking rates.
While it is unclear under what conditions foreign buyers will come back – after all TSY yields have already jumped high enough to where US paper should be more than attractive to foreign official institutions – one thing is clear: as of this moment the selling strike not only continues but is accelerating, and should the foreign liquidation of Treasuries fail to slow, Yellen will soon have to plan how to not only abort the current rate experiment which continues to pressure yields higher around the globe, but to start thinking how to soak up all the excess supply instead.