Well, if you needed another reason to believe that the Treasury selloff which gathered pace on Tuesday was set to continue, you got one this morning.
According to Bloomberg, “officials reviewing China’s foreign-exchange holdings are said to have recommended slowing or halting purchases of U.S. Treasuries.” Here are a few excerpts from their post:
The officials recommended that China closely watch factors such as the outlook for supply of U.S. government debt, along with political developments including trade disputes between the world’s two biggest economies, when deciding whether to cut some Treasury holdings.
For most of last year, China was adding to its U.S. sovereign debt holdings, monthly Treasury Department data show. The stockpile climbed the most in six years in June, after people familiar with the matter said that month that China was prepared to increase its Treasury investments under the right circumstances.
Between trade tensions and concerns over the batshit crazy U.S. political atmosphere (and those two things aren’t mutually exclusive), the “circumstances” appear to be “wrong”.
A couple of things here. Given that China already owns a shit load of US debt, a decision to suspend purchases is akin to shooting oneself in the foot. Also, do consider this comes at a time when the Fed is running down the balance sheet, so this is just more quantitative tightening (this amounts to a cessation of QE flow for US debt) – that is, this will mean private investors will have to shoulder even more of the burden just as more supply floods the market.
Additionally, the implication here is that China will be diversifying into more EUR debt. “It’s the FX market that’s likely to be most affected by the story that officials reviewing China’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries,” Bloomberg’s Richard Jones writes, adding that “the conspiracy theorist in me thinks the timing of this announcement is not accidental, and that the fact that Emmanuel Macron has been in China this week is not a coincidence.” Sure enough, look at the euro:
And here’s the dollar, which is diving:
Needless to say, U.S. yields knee-jerked higher on this…
…and futs moved quickly lower:
More to come.