Above, is what a very politically
motivated liquidation of Treasury holdings looks like.
As Trade Wars began
in April, the world's central banks and other official institutions dumped more
Treasuries (TSY) than in any month since January 2016, some $48.3BN, perhaps over
concerns of others
selling first, and precipitating a sharp move higher in yields. Fast forward
one month later to May, when according to the latest just released Treasury
International Capital (TIC) update, in May the selling of Treasuries by
official entities continued, with another $24BN sold in the month of May, when yields continued to rise
and eventually hit the 2018 highs of 3.11%.
But while the selling of Treasuries was to be expected -
after all someone had to sell aggressively to push yields sharply higher in
April and May - the question was who.
Contrary to some speculation, it wasn't Beijing, because
after shedding a modest $6BN in April, China actually bought $1.2BN in
Treasuries in May, leaving its holdings largely unchanged over the past month.
And while Japan did sell $12BN in TSYs
in April, it more than made up for its in May when it purchased $17.5BN,
bringing its total to $1048.8BN in May, which means that over the past two
month, Japan was a net buyer of US paper.
Meanwhile, the third most prominent holder, hedge funds, aka "Cayman Islands", bought for a second consecutive month, adding another $5BN.
So if the usual suspects were buying,
who was selling?
For
all the confusion about sharply higher yields in April, the explanation was simple: it was Vladimir Putin who
liquidated a whopping half of Russia's Treasury holdings, which declined by $47.4BN
to just $48.7BN - the lowest since 2008 - from $96BN in March.
But
wait, it gets better, because as Trump continued to jawbone about more
sanctions targeting Russia, Putin did not stop and in May he continued what was an outright
liquidation of Russia's TSY holdings, which plunged by another $40BN, or 82%, from
$48.7BN to just $9BN in May. Keep in mind this was over $100BN at the start of
the year.
It appears that when Putin warned he would diversify Russia's state
reserves -out of Treasurys - he was serious.
In other words, in just two months, Russia sold a whopping $81BN in treasuries, a liquidation flow that was likely responsible for much if not all the blow out in rates over the period. Because what else happened as Russia was liquidating 85% of its Treasury holdings in 2 months? 10Y yields soared from 2.7% at the start of April to the 7 year high of 3.11% in late May.
At that point,
yields tumbled again as traders freaked out over Trump's escalating trade war
with China, and proceeded to rush into deflationary safety.
Your
Watchman can't help but wonder - as the Yuan-denominated oil futures were
launched, trade wars were threatened, and as more sanctions were unleashed on
Russia - if this wasn't a
dress-rehearsal, carefully coordinated with Beijing to field test what would
happen if/when China also starts to liquidate its own Treasury holdings.
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