Tuesday, October 25, 2016

T-Bill Selloff

China and Saudi Begin to Liquidate US Treasuries - Massive Economic Consequences Possible, by Alice Greene, 10/24/16

As reported by 24/7 Wall Street, the total amount of Treasuries held in Federal Reserve custody is dropping fast as foreign banks continue to liquidate US paper. 

The number fell by more than $27 billion in September, sending the total amount of custodial paper to $2.83 trillion. This month, that number dropped to a post-2012 low of $2.80 trillion. 

In the past year, foreign central banks have sold approximately $346 billion in Treasuries – that’s over a third of a trillion. This pattern is “truly unprecedented in size and scope,” writes 24/7 Wall Street’s Douglas McIntyre. 

China and Saudi Arabia are among the biggest sellers (market price basis), with the former selling $34 billion in US paper in July. 

Saudi Arabia continues to sell its TSY holdings, which in August dropped from $96.5 billion to $93 billion.

China is liquidating US paper in order to offset devaluation pressure. Saudi Arabia is selling to provide funds needed to combat the nation’s soaring budget deficit and to offset the collapse of the petrodollar.

Foreign banks, reserve managers, sovereign wealth funds ... virtually every official institution in possession of US paper is selling. But to whom are they selling?

Private demand is the answer (at least for now).
What happens if - in addition to the continual liquidation by foreign institutions - private sellers proclaim a buyer’s strike? 

More federal monetization of US debt is most likely; in other words, more quantitative easing (QE). Meanwhile, the Fed hopes it can raise rates in the coming months to get more people to purchase treasury bonds. 

But our sensitivity to interest rates is severe, and this could mean another round of mortgage busts. It also means our debt will grow faster, leading to a massive increase in debt service.

For example, debt services at 1% cost $200 billion. At 2% this increases to $400 billion. These are payments where we no choice and no options. If we decide to solve the problem by having US mints print more money to support the national debt, substantial inflation will occur and perhaps hundreds of thousands of homeowners on the edge will lose their homes.

This situation is not unexpected, and analysts have long had grim predictions for both China and Saudi Arabia. 

The flagging Chinese economy has been on the back of Wall Street’s mind for months, and as I wrote in a previous article, analysts predict that Saudi Arabia is just 2-3 years from financial collapse. 

Editor's note: Obama's massive and uncontrolled spending is having its effect. Fasten your seat belts, it could be a wild ride.



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