Over the past two weeks we have seen the U.S. 10 year treasury roller coaster from a level of 2.2% on Aug. 17, to a low of 1.95 a week later. Yet since that time the 10 year has moved back above the ‘Mendoza line’ to its current position of 2.12%. And of course, the common response in the mainstream media to this drop in yield and spike in buying was due to a ‘flight to safety’ as traders exited the equity markets and moved into bonds.
But when you look at the entirety of the markets, and especially in relation to how U.S. bonds are affected by global economies that hold treasuries as dollar reserves, something interesting begins to emerge, and perhaps this time the old standby of a ‘flight to safety’ is really the Fed buying massive amounts of bonds to mop up what China is dumping as they work to put a tourniquet on their own economy.
The PBoC cut the RRR for all banks by 50bp and offered additional reductions for leasing companies (300bp) and rural banks (50bp). All these will take effect as of 6 September, and the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate. In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.
There you have it: in the past two weeks alone China has sold a gargantuan $106 (or more) billion in US paper just as a result of the change in the currency regime!
But wait, there’s more: recall that one months ago we posted that “China’s Record Dumping Of US Treasuries Leaves Goldman Speechless” in which we reported that China has sold some $107 billion in Treasurys since the start of 2015.
When we did that article, we too were quite shocked at that number. However, we – just like Goldman – are absolutely speechless to find out that China has sold as much in Treasurys in the past 2 weeks, over $100 billion, as it has sold in the entire first half of the year!
In retrospect, it is absolutely amazing that the 10 and 30 Year Bonds have cratered considering the amount of concentrated selling by China. – Zerohedge
According to statistician Dr. Jim Willie, the Fed has been using outside agencies referred to as the BLICS (Belgium, Luxembourg, Ireland, Cayman Islands, and Switzerland) as central points of collection for treasuries being dumped by Russia, China, and other nations to keep them off the central bank’s balance sheets, and to try to protect the U.S. bond markets from utter collapse.
In this new era of currency wars and ‘beggar they neighbor’ economics, China appears now willing to cause massive disruption to the dollar and the U.S. bond markets to protect their own as the global slowdown accelerates into recessionary levels. And if the belief is correct that China intends to slowly and methodically devalue its currency by 20% before all is said and done, expect the 10 year to go much lower as the amount of money needed to withstand so much dumping will assuredly go well beyond the Fed’s ability to control the onslaught.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com, Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.