Foreign Investors Systematically Dumping US Treasuries

[ghemminger]

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/17/ccview117.xml#wearefucked

[h1]Foreign investors veto Fed rescue[/h1]

By Ambrose Evans-Pritchard, International Business Editor

Last Updated: 12:11am GMT 19/03/2008

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As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.

Contagion fears sweep across the Atlantic
Dollar plunges as Fed steps up moves
Read more of Ambrose Evans-Pritchard

Desperate measures: Bernanke and the Federal Reserve need to keep on top of the crisis and continue to intervene if needed

Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."
The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.
Rightly or wrongly, a view has taken hold that Washington is cynically debasing the coinage, hoping to export its day of reckoning through beggar-thy-neighbour policies.
It is not my view. I believe the forces of debt deflation now engulfing America - and soon half the world - are so powerful that nobody will be worrying about inflation a year hence.

Yes, the Fed caused this mess by setting the price of credit too low for too long, feeding the cancer of debt dependency. But we are in the eye of the storm now. This is not a time for priggery.
The Fed's emergency actions are imperative. Last week's collapse of confidence in the creditworthiness of Fannie Mae and Freddie Mac was life-threatening. These agencies underpin 60pc of the $11,000bn market for US home loans.

 

[Sarge]

Hmmn and now this announcement,

http://money.cnn.com/2008/03/21/news/economy/treasurys/?postversion=2008032115

Now they are going to let the small investor's buy in at 100 bucks.

I wonder why? Buy that or silver for 100 bucks is the question?

Sort of sounds like desperation on their part.

No Wait, it is out of the goodness of their heart that they are going to let you get in for 100 dollars after all these years.

 

[seapilot]

Hmmn and now this announcement,

http://money.cnn.com/2008/03/21/news/economy/treasurys/?postversion=2008032115

Now they are going to let the small investor's buy in at 100 bucks.

I wonder why? Buy that or silver for 100 bucks is the question?

Sort of sounds like desperation on their part.

No Wait, it is out of the goodness of their heart that they are going to let you get in for 100 dollars after all these years.

Wait a month they will be selling for 10 bucks, while it will be hard to find any physical silver to buy for 20 bucks.

 

[scooter]

The yield on the 10-year treasury has been in free-fall for the past 6 months. So someone out there is buying these things. I wouldn't worry about the international holders. They aren't going to dump them too fast because it would destroy their reserves to do so.

 

[ams5995]

could you explain

could you explain that it would destroy their reserves to do so? Seems like if they all dumped them at the same times and bought...let's say.... Euros or Swiss Franc, or Yen, or whatever.... then they would get exchange rates very favorable for themselves. doing it all at the same time would be the problem, but something tells me it could be done. i don't know how it works but maybe someone else does to refute my idea.

 

[kyleAF]

There's nothing at all stopping China or others from exchanging their dollars for another, stronger currency...

 

[AceNZ]

Foreign Investors Systematically Dumping US Treasuries

Not buying treasuries isn't the same thing as dumping them...

The yield on the 10-year treasury has been in free-fall for the past 6 months. So someone out there is buying these things. I wouldn't worry about the international holders. They aren't going to dump them too fast because it would destroy their reserves to do so.

Ditto for the 2-year treasuries.

The 3-month bills is where the excitement is, though -- they fell from 2% a month ago to 0.25% last week! That's insane buying on a massive scale.

Maybe foreign investors are just moving into shorter-term securities?

 

[roguepatriot]

Not buying treasuries isn't the same thing as dumping them...




Ditto for the 2-year treasuries.

The 3-month bills is where the excitement is, though -- they fell from 2% a month ago to 0.25% last week! That's insane buying on a massive scale.

Maybe foreign investors are just moving into shorter-term securities?

Not buying might as well be dumping when we NEED to borrow $3 bilion a day to fund operations. This is very dollar negative.

People are moving into short term treasuries because they are scared shitless and don't trust the banks.

I think the TED spread was at an all-time high on Thursday. This is an indication of FEAR in the markets.

 

[roguepatriot]

could you explain that it would destroy their reserves to do so? Seems like if they all dumped them at the same times and bought...let's say.... Euros or Swiss Franc, or Yen, or whatever.... then they would get exchange rates very favorable for themselves. doing it all at the same time would be the problem, but something tells me it could be done. i don't know how it works but maybe someone else does to refute my idea.

Dumped to who? That's the probem - their reserves are so huge they couldn't possibly find buyers.

 

[roguepatriot]

There's nothing at all stopping China or others from exchanging their dollars for another, stronger currency...

The US tried to auction off a few billion on Tuesday and failed. Who is going to buy the Trillion in treasuries that the Chinese are sitting on?

 

[ghemminger]

Not buying might as well be dumping when we NEED to borrow $3 bilion a day to fund operations. This is very dollar negative.

People are moving into short term treasuries because they are scared shitless and don't trust the banks.

I think the TED spread was at an all-time high on Thursday. This is an indication of FEAR in the markets.

I am very confused about all of this can someone break it down to the ridicoulous? Help me understand???

 

[AceNZ]

The US tried to auction off a few billion on Tuesday and failed.

There was no failure. The Treasury sold every bond they put up for sale last week, and at near record prices (low yields) -- if anything, I would call their sale a huge success. The difference was that they had a lot fewer foreign investors than they usually do.

 

[DrCap]

There was no failure. The Treasury sold every bond they put up for sale last week, and at near record prices (low yields) -- if anything, I would call their sale a huge success. The difference was that they had a lot fewer foreign investors than they usually do.

Possibly also what has happened is a lot of people are pulling money out of the markets (stock, real estate, commodities) and going into what is a 'safe bet' Remember that the US treasury, since it can print money, won't default on it's loan, unlike the possible risk of loosing value in 1). a falling stock market 2). a falling commodities market 3). a falling real estate market.

Many big guys may simply be buying treauries to 'park' their money til the dust settles. Of course this has the inflation risks, which is why it will be really interesting when the fed autions the TIPS (inflation 'protected' debt). The Tips may actually trade at 0% yield.
Government bonds, and treasuries are a flight to safety when the market has jitters, just as gold is a flight to safety. Personally I think gold is safer than treasuries, but if it lost 10% last week, and did this a few more times, treasuries would look like a nice place to park a $100 million if you were managing a pension fund or something like that.

Now compound that flight to safety with the problem of a falling dollar, relative to other currencies, and the US buyers were much more likely to buy treasuries while the foreigners are probably more worried about loosing money due to relative currency changes. If you are a foreigner already holding lots of dollars, (dollar denominated assets) you probably don't want to rush out and buy more as your fund has lost 10% in the past month (relative to the yen, euro, etc.)

Don't get me wrong, I'm not defending what people in the market may be doing, I'm just offering my 2 cents to try to explain what may be happening.

 

[roguepatriot]

There was no failure. The Treasury sold every bond they put up for sale last week, and at near record prices (low yields) -- if anything, I would call their sale a huge success. The difference was that they had a lot fewer foreign investors than they usually do.

Huge Success?

From the article:

"It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."

 

[freedominnumbers]

Dumped to who? That's the probem - their reserves are so huge they couldn't possibly find buyers.

That's where you are wrong. They can be dumped to commodities, business investment and other hard assets.

A foreign holding of US dollars basically translates into upcoming exports. The only question is what will be the export. It could be ownership interest in our business infrastructure or other strategic investments.

 

[JosephTheLibertarian]

Good. I want the economy to collapse, people need to wake up.

 

[roguepatriot]

That's where you are wrong. They can be dumped to commodities, business investment and other hard assets.

A foreign holding of US dollars basically translates into upcoming exports. The only question is what will be the export. It could be ownership interest in our business infrastructure or other strategic investments.

The Chinese and Japanese are sitting on almost $1T in US treasuries each. Who is going to buy $2T worth of US treasuries if they decided to 'dump'?

I agree that rationally they should be diversifying their reserves, but their holdings are too large for them to 'dump' them in any meaningful way. So the game continues...

 

[Acala]

Someone

Someone will buy them if the price is low enough. The holders will have no choice BUT to sell if inflation gets bad enough. MAYBE you can stomach losing five percent a year until the note matures. But what about 10% or 20%? Nobody is going to hold on then and there will be a rush for the door. High enough inflation is the equivalent of a default. Once the rush to sell US notes happens, the dollar is done.

 

[AceNZ]

The Chinese and Japanese are sitting on almost $1T in US treasuries each. Who is going to buy $2T worth of US treasuries if they decided to 'dump'?

Instead of selling the treasuries, they could also just wait until they mature. With the steepening of the yield curve, the market seems to be showing us that holders of treasuries are moving into shorter-term maturities. Perhaps they're positioning their portfolios to be ready to move into alternative investments.

 

[scooter]

Ace is right on in this thread. I have seen no signs of running away from treasuries, except there has been a much stronger rise in the shorter maturities. I think this is due to the flight to safety. It's investors finding a perceived safe place for their cash until they think it is safe to buy stocks and other assets again.

As for those who think that China and Japan can just "dump" their assets, that could not happen. They have so much of our debt that it would take many years to slowly find buyers for it all. As I mentioned before, if they sold too fast it would sink the price of their investments.

There isn't a reason for China to dump treasuries right now. The price on them is going through the roof and they got in while the yields were still good.