The People’s Bank of China dropped a real bombshell this week. A high level official giving a speech at Tsinghua University indicated that “It’s no longer in China’s favor to accumulate foreign-exchange reserves”. Already holding close to $1.3 trillion of U.S. Treasuries, you can hardly blame them.
Not only have they lost principal value as interest rates have spiked, but the coupon yield is bouncing around 30-year lows. The other problem has been the relentless increase in the issuance of all forms of credit, including cash, the latter being zero-coupon perpetual Treasuries in our view. We can’t think of a more unappealing investment.
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