by Chris Hamilton, Econimica blog, via Zero Hedge:
Since July of 2011, two of the largest and most important asset classes in the world, US Treasury debt and gold valuations, have been moving in contradiction to supply and demand data. US Treasury rates have fallen by a third since the vast majority of previous buyers since have ceased accumulating… and gold has fallen about 25% on increasing physical demand. These are simply not the hallmarks of a free market. However, the only thing investors should be more afraid of than a free market correction or potential market crash is the absence of free markets…
China has run a $4 trillion trade surplus with the US since 2000. So, no shock China is the largest single holder of US Treasury debt (outside of the Federal Reserve) and has accumulated nearly a trillion dollars in US Treasury debt since ’00. In total, China now holds $1.24 trillion in US Treasury bonds.
Despite China continuing to run perpetually larger trade surplus’ with the US, China ceased accumulating Treasury debt (net) in July of 2011(coincident with the US debt ceiling debate…and the peak in Gold prices) and has been net selling US Treasury debt since.
Since July 2011, China has collected $2.2 trillion in US trade surplus dollars and recycled none of them (net) into US Treasury debt. This after China recycled 50%+ of it’s trade surplus into US Treasury’s over the previous 11 years. So what has China been buying with all those dollars since 2011? Among other things, buying an awful lot of gold. Perhaps as much as a trillion dollars worth since July 2011…and on this ongoing gold buying, perhaps 5,000 tons but even potentially in excess of 10,000 tons, gold prices have fallen by a third!?! Conversely, on the buyers strike in Treasury’s, yields fell by a third?!?
Typically when buyers disappear and new flow continues and existing stock is at record levels, prices fall and yields rise to entice new buyers. However, in the case of US Treasury bonds, we are to believe that domestic sources of buying (US pensions, insurers, banks, etc.) have taken over buying since year end 2014. Buying Treasury assets yielding far below domestics needed rates of return (essentially laddering into 0.5% to 2.5% yielding assets vs. 7.5% plan payouts)? Where did these domestic sources get the $1 trillion without selling other asset classes?
Who Is Buying Treasury’s?
The chart below highlights US Treasury issuance, by period, and what source purchased the debt. Quite noticeably, the most recent period has seen a near abandonment of US Treasury debt accumulation by foreigners simultaneous with the Fed’s cessation of net new QE.
Noteworthy was the cessation of Treasury buying by the BRICS (those nations running dollar trade surplus’) as of 2011…entirely replaced by the BLICS from 2011–>2015 (banking nations with little or no trade surplus with which to make the purchases).
The chart below highlights when QE began, rates rose during each period of QE and fell when QE was tapering or ceased. Likewise, when China & the BRICS ceased recycling dollars into Treasury’s in 2011…rates fell. And when the Fed and the remainder of Foreign Treasury buying ceased since at year end 2014…rates fell even further?!?
Trade Surplus Recycling:
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