Posted on 07/23/2022 6:49:12 PM PDT by elpadre
Mainland China reduced its holdings of United States debt by US$23 billion to US$980.8 billion in May from April, the first time the total dropped below the US$1 trillion mark in 12 years, the US Treasury Department said on July 18. China’s US debt holdings have dropped for six consecutive months.
Japan, the current largest holder, and more than 10 other holders of US Treasuries also disposed of their US debts to some degree.
What caused the US debt to fall out of favor?
Wang Yongzhong, director and researcher of the International Commodities Research Office of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, told Guancha.com that the United States’ sanctions and freezing of assets of countries such as Russia and Afghanistan had caused concern about the safety of the US debt investments.
Another reason, he said, was that high inflation in the US has also led to “a reduction in the US Treasury yield.”
“US Treasuries themselves are risk assets, so our holdings are also declining,” said Wang.
Wang said it was an overall trend that China would have a more flexible and diversified allocation of its overseas assets. However, he added that the US dollar remained a very important overseas asset for China.
“Although the purchasing power of the US dollar has fallen sharply, it is still a ‘strong currency,’” he said. “Returns from other bonds, such as those in Europe and Japan bonds, are less than those of the US bonds.”
(Excerpt) Read more at asiatimes.com ...
The move out of Treasuries by sellers is a bet that interest rates are moving up. Since bonds respond to rate hikes by going down in price, that can be a prudent move on the part of the sellers. The buyers are betting that rate hikes will overshoot by cratering economic growth, upon which the Fed will respond by rapidly cutting rates again below where they are currently, thereby delivering a capital gain for bond investors gutsy enough to buy when everyone else is selling. For instance, 30-year Treasuries peaked at a yield of over 14% in the early 80’s, and then plunged back below 10% within several years. Anyone who bought near peak yield and held on made a ton of money. (For instance, average annual stock market returns since 1980 are only around 8%).
excerpted:
“..A US National Debt Clock is erected on Sixth Avenue between 42nd and 43rd Streets in New York, updating the total US debt data in real time. At 10:30 am on July 20, this clock, which looks like an airplane dashboard, showed that the total US federal debt had exceeded the US$30.59 trillion mark, equivalent to 129.88% of US GDP.
For half a century, the US has been using the US debt in the form of investment products to support its currency...”
No, the real annual return since 1980 is 8.2%; but the nominal is 11.5%
[No, the real annual return since 1980 is 8.2%; but the nominal is 11.5%]
Another reason the Chicoms might want to sell Treasuries is to raise cash. The US dollar is stronger against other major currencies than it has been in a long time. For example the dollar is up about 25% on the yen, and it nearly reached parity with the euro. That makes goods cheaper from those countries if paying dollars, in spite of inflation.
Re: What caused the US debt to fall out of favor?
The trading value of the US Dollar against a basket of foreign currencies has been above or near a twenty year high for the last six months.
The only way that traders or sovereign treasuries can get a higher interest rate is to accept higher default risks.
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