Foreign Governments Dump US Debt At Record Pace;The 9 Biggest Risks Facing the World Today

Foreign Governments Dump US Debt At Record Pace

IN THIS ISSUE:

1. Foreign Governments Dump US Debt At Record Pace

2. Record Amount of US Debt Dumped by China in 2015

3. Report: The 9 Biggest Risks Facing the World Today

Overview

Editor’s Note: I have been traveling the last few days, so I will reprint two of the more interesting articles I ran across in the last week. We’ll start with an article from CNN which confirms that numerous foreign governments are unloading US Treasury debt at a record pace.

This includes China, the largest holder of our debt, which became a huge seller of Treasuries last year. We will also look at some of the reasons why foreign central banks are dumping Treasuries, many like never before.

We will finish today with a new report from the Economist Intelligence Unit which has a list of the nine largest risks facing the world today, and how likely each of them is to happen. It is an interesting report, although I would have a few other risks to add to the list.

Foreign Governments Dump US Debt At Record Pace

by Matt Egan, CNN Money [Emphasis mine.]

Foreign governments are dumping U.S. debt like never before. In a bid to raise cash, foreign central banks and government institutions sold $57.2 billion of U.S. Treasury debt and other notes in January, according to figures released on Tuesday. That is up from $48 billion in December and the highest monthly tally on record going back to 1978.

It’s part of a broader trend that gathered steam last year when central banks sold a record $225 billion of U.S. debt. “Foreigners have no longer been our BFF [best friends forever] when it comes to buying U.S. Treasuries,” Peter Boockvar, chief market analyst at The Lindsey Group, wrote in a client note.

So what are foreign central bankers doing with these piles of cash? They’re mostly using the funds to stimulate their own economies as the global growth slowdown and crash in oil prices continue to take their toll.

For instance, China has been liquidating its holdings of foreign debt to pump money into its slowing economy, plummeting currency and extremely volatile stock market. China, the largest owner of U.S. debt, trimmed its Treasury holdings by $8.2 billion in January, the Treasury Department said. The actual decline was likely larger considering China reported selling $100 billion of foreign-exchange reserves in January.

Foreign Governments Dump US Debt
Foreign Governments Dump US Debt

Oil Crash Fuels Sales

Countries exposed to the oil price crash are using the cash to fill giant holes in their budget. Norway, Mexico, Canada and Colombia all cut their Treasury holdings in January as oil plunged below $30 a barrel for the first time in a dozen years.

Foreign sales of U.S. debt appear to be largely driven by economic necessity.

“These foreign sales are not fundamentally driven. The U.S. economy seems to be on better footing,” said Sharon Stark, fixed income strategist at D.A. Davidson.

That’s why total foreign holdings of U.S. debt actually rose in January to $6.18 trillion. That’s because demand from global investors continues to be high. Besides, some foreign governments added to their piles of Treasury bonds, including Japan, Brazil and Belgium.

But There’s Still Lots of Demand for U.S. Debt

Despite all these foreign government sales, demand for U.S. Treasuries remains high. In fact, the U.S. can borrow money at a lower rate now than at the beginning of the year.

The benchmark 10-year Treasury yield is sitting at 1.99%. That’s down from nearly 3% two years ago. Demand is driven by the relative strength of the American economy, which continues to add jobs at a healthy pace despite the global headwinds.

The diminished appetite from overseas is being offset by a number of factors. First, the turmoil in global financial markets has boosted appetite for safe-haven assets like U.S. government debt.

U.S. Treasury Low Yields are Better Than Nothing Elsewhere

Second, foreign central bankers in Europe, Japan and elsewhere are experimenting with negative interest rates to stimulate their sluggish economies. This phenomenon has the side effect of pulling down rates for U.S. debt. Plus it makes U.S. debt more attractive as an investment.

Even though the Federal Reserve’s bond-buying program has ended, the U.S. central bank continues to gobble up Treasuries. That’s because the Fed is reinvesting the proceeds from its $4.2 trillion portfolio by purchasing U.S. debt.

All of these factors help explain why few think Treasury bonds’ role as the bedrock of the global financial system is going away any time soon.

“Treasuries are the best kind of collateral out there. The U.S. still engenders the most confidence over the next 10 years relative to other economies,” said Nicholas Colas, chief market strategist at ConvergEx.

END QUOTE

Record Amount of US Debt Dumped by China in 2015

Gary here. The largest owner of US debt, China, sold $18 billion of US Treasury debt in December. For all of 2015, China is estimated to have sold apprx. $187 billion of Treasury securities, and even that figure may be low. It was the first year on record that China was a net seller of US debt.

And China is not alone. Japan sold even more in December: $22 billion. In the past year, Mexico, Turkey and Belgium have also lowered their holdings of US debt, all of which and more have led to a record annual dump by foreign central banks.

According to the Treasury Department, foreign central banks sold a record $225 billion of US debt last year, the most since at least 1978, the first year such data was kept. In 2014, there was a net increase of $45 billion.

US treasury bond net purchases by foreign banks Foreign Governments Dump US Debt
Foreign Governments Dump US Debt

Many countries are suffering from the global economic slowdown, forcing central banks to pull out all the stops to help buttress their economies. Foreign governments sold more U.S. Treasuries than they bought in 11 out of 12 months last year, according to Treasury data.

For many central banks, selling US Treasuries gives them the cash to prop up their collapsing currencies. “These interventions are trying to add some air to the parachute,” says Win Thin, head of emerging market currency strategy at Brown Brothers Harriman. China spent $500 billion last year just to prop up its currency, the yuan.

We will revisit this issue in the weeks and months ahead, especially if this trend continues.

Report: The 9 Biggest Risks Facing the World

We now turn our attention to some of the most important risks facing the global economy this year, as ranked by the Economist Intelligence Unit’s Global (EIU) Risk Index.  The EIUlooks at what it considers to be the greatest risks and scores them in terms of how likely they are to occur. This story ran last week in the BUSINESS INSIDER.

These are the 9 Biggest Risks Facing the World
by Will Martin

Governments worldwide are trying to solve the puzzle of slowing growth, financial markets are struggling to find stability, and several major geopolitical crises are causing problems across the world. But exactly what are the

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