July 10, 2011
There has been much speculation recently about whether or not China is or isn’t dumping its holdings of US Treasurys. Spoiler alert: it isn’t. At least not outright. After all, it still is not a self-sustaining economy and as such relies on what’s left of the US middle class to purchase its production. In fact, according to the latest TIC data, after 5 months of declines, Chinese UST holdings increased in April 2011. The problem with TIC is that it is woefully late. It is also terribly unpredictable and subject to annual adjustments which see hundreds of billions adds or subtracted from estimated holdings. Furthermore much has happened in the period between April and the first week of July. Namely the end of QE2. Furthermore many will note that there has been little if any change in market sentiment to Treasury paper now that QE2 is over (which is actually very much untrue after last week we saw the biggest percentage blow out in the 5 Year in history). But for the best indication of what non-US based buyers of Uncle Sam’s paper think about the desirability of said paper, we went to the source, and compiled all Auction issuance data since the June 2009 bidder reclassification rules. The result is quite striking. Over the past 2 years, foreign demand, expressed by the final take down as a percentage of total auction size across the entire curve (2,3,5,7,10, and 30 Year) has plummeted from 55% to just below 35% as of the last auction.
Stated otherwise, and as seen on Chart 2 below, Primary Dealers (mostly) and Direct Bidders (to a very minor degree) now account for roughly two thirds of all Treasury placement. The problem is that Dealers no longer can flip their holdings to the Fed as Zero Hedge had been demonstrating POMO after POMO. And since the debt ceiling will be raised, and since nothing in Washington will change vis-a-vis deficit spending when all the posturing smoke and mirrors clear, the Treasury will have no choice but to issue another $2 trillion in debt over the next year.
The only question is who will it sell it to?
And yes, there will be demand, even foreign demand, for Uncle Sam’s paper. But at what price. Certainly not at prevailing rates.
We may have our answer as soon as next week’s issuance of $66 billion in 3, 10 and 30 year paper. Because if the recent issuance of 2, 5, and 7 Years was any indication about foreign interest, watch out below.
This article was posted: Sunday, July 10, 2011 at 5:37 am