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Foreign Governments Dump US Debt At Record Pace

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

March 22, 2016

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 accelerate US debt sales

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

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 EIU looks 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 biggest challenges facing humanity right now?

To find out, we took a look at the Economist Intelligence Unit’s Global Risk index. The EIU takes a look at the biggest problems facing the world, and gives each one a score of zero to 25, with 25 being the highest possible score of happening.

The Index is updated monthly to reflect changes in the global political and economic environment, and the March update, released on Wednesday night, includes some new and surprising risks.

Check out what the EIU thinks are the 9 biggest risks facing the world below.

9 (joint). War in the South China Sea
Score:
8 out of 25 (8/25)

War in the South China Sea

Tensions in the South China Sea — which center around a group of islands claimed by China, Vietnam, Malaysia, and the Philippines — have escalated in recent years, with the USA's involvement helping to stoke ill-feeling, which could eventually lead to a full scale conflict.

What the EIU says: "Any worsening of the row could seriously undermine intra-regional economic ties, and potentially interrupt global trade flows and simultaneously depress global economic sentiment more broadly."

9 (joint). Britain voting to leave the EU
Score: 8/25

Brits go the polls in June to decide on whether the UK would be better in or out of the European Union. Leave campaigners argue that a so-called Brexit would return sovereignty to the country, while those in the Remain camp say that leaving the EU would essentially amount to economic suicide.

What the EIU says: "If Britain did leave the EU it would have negative ramifications for the UK - still the fifth biggest economy in the world, and whose exporters would struggle in the face of regulatory and tariff uncertainty, and whose position as a leading global financial services hub would be imperiled. However, it would also harm the EU itself, given that the UK is one of the few relatively fast-growing economies in Europe, and has also been a leading proponent of trade and services liberalisation. Finally, the shock of a "Brexit" could also exacerbate the ongoing global currency instability, notably in the West."

7 (joint). The rise of jihadi terrorism
Score:
12/25

Jihadi Terrorism

The rise of Islamist terror group ISIS dominated headlines in the past year after its terrorist attack on Paris. The group has conquered large swathes of Iraq and Syria, where it is imposing a brutal regime on citizens. ISIS' growing influence in the Middle East is a huge risk to global stability.

What the EIU says: "Should the current spiral of terrorist attacks and reprisals escalate, it would no doubt begin to dent consumer and business confidence, which in turn could threaten to end the five-year bull run on the US and European stock markets."

7 (joint). Donald Trump becoming President of the USA
Score:
12/25

The Economist Intelligence Unit sees a Trump presidency as a massive risk to the world. Trump has risen from something of a joke candidate to the runaway leader in the race for the Republican presidential nomination.

His aggressive stances on everything from immigration to the American economy have sparked anger from many Americans and split the Republican Party. Fears abound in some sectors of society that a Trump presidency could be disastrous.

What the EIU says: "Although we do not expect Mr. Trump to defeat his most likely Democratic contender, Hillary Clinton, there are risks to this forecast, especially in the event of a terrorist attack on US soil or a sudden economic downturn…

5 (joint). Greece leaving the euro, triggering a break-up of the eurozone
Score:
15/25

At points in 2015, it looked almost certain that Greece would be forced to exit the euro as it struggled to repay loans owed to the IMF and ECB. That imminent threat seems to have passed, but Greece leaving the single currency still remains highly possible.

What the EIU says: "Countries leaving the euro zone under duress would suffer large devaluations and be unable to service euro-denominated debts. In turn, banks would suffer huge losses in their sovereign bond portfolios, resulting in major disruption to the global financial system and plunging the world economy into recession."

5 (joint). Fracturing of the European Union
Score:
15/25

Fracturing of the European Union

Several factors, including the continuing debt crisis in the eurozone, stagnant economic growth, and arguments over the continent's refugee crisis have all led to fears about the weakening of the European Union. Should the EU begin to fragment, the consequences could be dire.

What the EIU says:  "In the event that the EU began to fracture and land borders reimposed, trade flows and economic co-operation would be hindered, harming growth in the world's largest single trading block - and notably in trade-reliant Germany, which shares land borders with ten fellow Schengen members - and leaving the fragile euro zone states more vulnerable in the event of another economic downturn."

3 (joint). An emerging market debt crisis
Score:
16/25

The EIU warns that volatility in currency markets could lead to a major debt crisis in the world's emerging markets. It's a view followed by many others.

What the EIU says: "Any rolling emerging-market debt crisis would cause considerable panic across the global capital markets, and may require governments in several economies to step in to shield their banks from the fallout - risking a repeat of the banking crises witnessed in Europe at the start of this decade."

3 (joint). A new "Cold War" sparked by Russia
Score:
16/25

Russia is currently involved in conflicts in both Ukraine and Syria (although it has scaled back its presence in Syria in recent days) and the EIU says that East-West relations are now at their "chilliest" since the end of the Cold War in 1991.

That could spark a major global conflict, increasing military spending, and therefore making economic issues across the globe even worse.

What the EIU says: "This bifurcation of global geopolitics could, if unchecked, seriously hinder a whole raft of shared policy goals - ranging from countering jihadi terrorism to combating global warming - as well as always holding the potential for escalation.

1. China experiencing a "hard landing"
Score: 20/25

Image result for china country graphicChinese flagThe slowdown of the Chinese economy, which has seen growth shrink from more than 10% a year to under 7%, is a major concern for the world as virtually all big economies rely heavily on trading with China. If China's economy slows substantially, so too will the global economy.

What the EIU says: "If China's economy slows by more than we currently expect, it will further feed the ongoing global commodity price slump (especially in oil and, in particular, metals), with a hugely detrimental impact on those Latin American, Middle Eastern and Sub-Saharan African states…

END QUOTE

In closing, I don’t necessarily agree with all of the risks cited by the Economist Intelligent Unit’s list. Specifically, I would not have listed Donald Trump as a global risk. While I’m not a big Trump fan, I don’t think he belongs on this list. I can think of several other risks that could be on the list.

I also might not agree with all of EIU’s probabilities of the risks occurring, such as their 80% odds of China going into recession this year. In any event, it gives us something to think about.

I’ll be home and back to my normal schedule later this week.

All the best,

Gary D. Halbert

 

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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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