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What Would Happen If EVERYONE Joined China In Dumping Treasurys?

from Zero Hedge:

Attacking the Second Amendment is a major component of campaign On Tuesday evening in “Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks,” we quantified the cost of China’s near daily open FX operations in support of the yuan.

As BNP’s Mole Hau put it on Monday, “whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix,[thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term.” And a reduced role for the market means a larger role for the PBoC and that, in turn, means burning through more FX reserves to steady the yuan.

Translation and quantification (with the latter coming courtesy of SocGen): as part of China’s devaluation and subsequent attempts to contain said devaluation, China has sold a gargantuan $106 (or more) billion in US paper just as a result of the change in the currency regime.

Notably, that means China has sold as much in Treasurys in the past 2 weeks – over $100 billion – as it has sold in the entire first half of the year. Today, we got what looks like confirmation late in the session when Bloomberg, citing fixed income desks, reported “substantial selling pressure in long end Treasuries coming from Far East.”

The question or rather, the series of questions, that need to be considered going forward are:

“What happens when China liquidates all of its Treasury holdings is anyone’s guess, and an even better question is will anyone else decide to join China as its sells US Treasurys at a never before seen pace, and best of all: will the Fed just sit there and watch as the biggest offshore holder of US Treasurys liquidates its entire inventory…”

And make no mistake, these are timely questions, because the combination of collapsing commodity prices, China’s devaluation, and the threat of a Fed hike have put enormous pressure on EM currencies the world over and that, in turn, means a drawdown of EM FX reserves and pressure on DM bonds. As JP Morgan put it last month, “the sharp reversal in EM FX reserve accumulation between Q1 and Q2 is consistent with the sharp reversal in DM core bond markets. Core bond market yields collapsed in Q1 but saw a big rise in Q2. This is a good reminder of how important FX reserve managers remain in driving core bond markets.”

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18 comments to What Would Happen If EVERYONE Joined China In Dumping Treasurys?

  • CalSailX

    At times one has to remind oneself, and those applying the pressure that they really don’t understand the hand grenade that they are sitting on. Hell if the NSA was worth less then half a shit, they could tell us who had access to the Clinton Whore Server.
    From the day it went on line! That they can’t or will not tells us all!

  • Craig escaped from Detroit

    If all the other countries dumped their “Load” of Treasuries all at the same time?

    It would clog all the pipes, the toilet bowl would overflow and make a mess on the floor (of the stock, bond and 4X markets). Traders and Brokers, savers, hedgefunds, etc,, would all need another box of DEPENDS diapers, real fast.

    Da Roof,, da roof,, da roof is on fire,, we don’t need no water let the M..F”r BURN. (lyrics from a Ghetto song from years ago.)

  • Christine

    Didn’t Jim Willie in one of his interviews indicate that Russia has been dumping as well all along, while the BLICS (Belgium, Luxembourg, Ireland, forgot what C stands for and Switzerland) were buying them for the Fed in order to keep the dollar propped up?

    • Craig escaped from Detroit

      @Christine,
      Bingo.. give that lady a golden star. Jim Willie did say the Russian were (and are) also dumping Treasuries, (and I’m sure we can also include Saudi, India and some others in the basket of Chump-Dumpers.

      I was just looking at a bullion dealer (Providentmetals),, at most of the “silver products”.. and more than 50% of everything in the “catalog”,, is either “OUT OF STOCK” (or DELAYED shipment).

      It’s clear that the RETAIL sellers are getting lower and lower of inventory.. but I don’t yet think the COMMERCIAL sellers (smallest order is 5,000 ounces),, are yet falling short,, but this could change with a SINGLE big order.

      Keeping in mind, that the WORLD supply of silver,, is NOT even enough to give each human (7 billion of us).. not even ONE full ounce of silver for each of us “useless eaters”. So, of course, if any NON-ELITE-Buyer,, tried to buy a billion dollars worth of silver,, they would meet a nail gun or plane crash with their name on it.

      So the ONLY “entities” allowed to make such a LARGE acculuation, would be either the FED approved channels.. or Russia or China.. (somebody with enough FIRE POWER to resist the long arm of the American military or hit squads.)

      • bob

        I would not use the term “dumping” as many are doing to describe the decrease over time of Russia’s or China’s holdings of Treasuries. Dumping sounds like they are unloading in mass when they are not. If they are “dumping” why is it some months the amounts that they own increase. Such was the case just in June of this year when both China and Russia increased their holding by a total $7 billion. And many of the individual monthly declines have been relatively small.

    • bob

      Could be true but Russia was never really a large holder of Treasuries. The most was they held was $171 billion back in October 2012.

    • Eric

      Pretty sure the C stands for the Caymans.

      And no, china is not increasing it’s US treasury holdings.

      http://www.zerohedge.com/news/2015-08-27/its-official-china-confirms-it-has-begun-liquidating-treasuries-warns-washington

      • Jerry

        Eric,

        You are correct that China is not increasing their Treasury holdings at the present time and probably will not in any meaningful way in the future. Over the last year they have been decreasing their holdings but not steadily. Some months there are large declines, some months small declines and in a few months small or even large increases. In June, according to the same data sources that the ALT media uses, China and Belgium increased their holdings by a total of $7 billion.

        • Craig escaped from Detroit

          Well, an increase of $7 Billion during one period,, vs “off loading/dumping” at an average daily rate of $7.5 billion EVERY DAY for 14 days.. says everything I need to support my own opinion that they have indeed been DUMPING them.

          I don’t need to dance around with words or nuances to make it more agreeable. It is what it is.

          I think some people,, just like to argue about things just because they nit pick to find chinks in the story so they can try to make a point.

          Some people just find it hard to say “yes” and be done with it.

            • Craig escaped from Detroit

              You really SHOCKED me,, I smiled and laughed at what you just did. It was great.

              I was getting scared,,and starting to think you may be like one of my own family members that can never agree with anything and must always drone on endlessly to prove how they must always be right on everything in the universe,,and they keep talking until everybody just gives up and walks away.

              You took the high road and didn’t do that. It totally shocked me with a big smile.

              BRAVO Jerry… I love you. Thanks again.
              YOu do add very bright comments when ever I find your writings. Don’t stop.

              • Jerry

                Craig,

                I do agree with you that China appears to have decided to decrease their amount of FX reserves at a faster rate than in the past. If China did decrease their FX reserves by $100 billion or so the past two weeks and most of it was Treasuries then describing it as Treasuries being “dumped” would be accurate. And you are correct about nit picking. I have to admit I do tend to do that at times probably in part because I am a little bit of a perfectionist. Of course there are times that I am wrong myself. And thanks for the kind words.

  • Craig escaped from Detroit

    Hello Bob,
    I’m all ears,, willing to listen to every logical factual bit of information you can share with us.

    …, so you would NOT use the term “dumping”… since China SOLD,, slowly, measured, trickle.. of just $50 Billion dollars of Treasuries each week,,, for 2 weeks in a row.. what name would YOU apply to this slow trickle of sales?

    A total “non dumping” of $102 or 105 Billion dollars of treasuries in just 14 days. If that’s not real dumping,, then what is it?

    • Jerry

      Craig,

      He said that he “would not use the term “dumping” as many are doing to describe the decrease OVER TIME”. I agree. Also when someone is dumping something they are not also buying at the same time. Most countries including China buy Treasuries every month. Some months the total amount that they hold declines because they sold more than they bought that month. Also some bonds do mature. So some of a countries decline could be just because they had bonds that matured not that they were sold.

      Also it is China’s FX reserves, which Treasuries are a part of that, declined by $100 billion or so in two weeks. Not necessarily all of it being Treasuries. Most could be Treasuries or only half or less could be.

  • Christine

    @ Bob,

    You may have a point. “Dumping” may be an inaccurate description. What China and Russia have been doing is use their treasury bonds as a payment instrument, with all of Washington’s allies with which they have trade relations, while using their own currencies with their own BRICS partners. They’ve been… offloading.

  • Christine

    Eric,

    You’re right. Listening to Jim Willie and C indeed stands for the Caymans.

    Bob,

    Offloading sounds better than dumping but… the result is the same. They are doing away with the petrodollar, and much faster than anyone anticipated it.

  • Christine

    @ Jerry,

    Misunderstanding? I didn’t notice. Things are going too fast for any one of us to grasp the whole picture all at once. I miss a lot too. I listen to certain people who anticipate what will happen, observe it unraveling, confirm what they saw and anticipate the next step of the elimination of the petrodollar and subsequent WS/Big Oil/Big Pharma retaliation. It is both exciting and worrisome because it’s hitting us from every angle all at once. The entire fabric of our society is crumbling with the petrodollar. Everything money ruled is collapsing. Why? Because the only thing that held it together was… fiat money! Remove the money and everything falls. Right now, fiat is being killed. So everything held by it is collapsing. Put into the equation the speed at which the US are losing allies. Putin just met with UAE and Egypt and is hosting that enormous MAKS show to which 25 countries are participating, including Germany, France, UK, Iran and many more. NATO is short lived. NATO dies, Washington dies. Washington dies, we have a crack at peace. But everyone not aware of what is in play will suffer tremendous growing pains. With a few bombings. Until we do get peace.

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