The Great Treasury Dumping Game Continues

A few months ago I wrote:

A couple months ago, I hypothesises about the possibility foreign treasury dumping:

It is becoming clearer and clearer that America cannot and will not produce a coherent economic strategy. China seems to be beginning to offload not only its Treasury balance, but also its dollar pile.

Then I noted some of the prospective dangers:

Now we get the news that creditors are currently engaged in a huge Treasury liquidation.

A new post from Zero Hedge establishes that Russia is joining the Treasury-dumping party:

  • IMF’S LAGARDE SAYS EUROPE DEBT CRISIS `ESCALATING’
  • IMF’S LAGARDE: CRISIS REQUIRES ACTION BY COUNTRIES OUTSIDE EU

Well, we know the UK is now out, courtesy of idiotic statements such as this one by Christina Noyer. So who will step up? Why Russia it seems.

  • RUSSIA CONSIDERS PROVIDING UP TO $20B TO IMF, DVORKOVICH SAYS

Why’s that? Because like China (more on that in an upcoming post), Russia just dumped US bonds for the 12th straight month and instead both Russia and China are now focusing on making Europe their vassal state. So now we know where the money is coming from – sales of US debt of course!

Source: TIC

Is the US quietly becoming increasingly isolated in global affairs?

The question as to whether the US is becoming increasingly isolated is completely spurious; the United States isolated herself politically way back when in 1971 she took itself off the gold standard, and decided that she could get a free lunch at others’ expense from printing money.

The key thesis I have advanced seems to be hotting up:

What would a treasury crash look like? Most likely, it would be dictated by supply — the greater the supply of treasuries coming onto the market, the more there are for buyers to buy, the lower prices will be forced before new buyers come onto the market. Specifically, a treasury crash would most likely begin with a big seller dumping significant quantities of treasuries bonds onto the open market. I would expect such an event to be triggered bylower yields— most significant would be the 30-year, because it still has a high enough yield to retain purchasing power (i.e. a positive real rate). Operation Twist, of course, was designed to flatten the yield curve, which will probably push the 30-year closer to a negative real return.

A large sovereign treasury dumper (i.e. China with its $1+ trillion of treasury holdings) throwing a significant portion of these onto the open market would very quickly outpace the dogmatic institutional buyers, and force a small spike in rates (i.e. a drop in price). The small recent spike actually corresponds to this kind of activity. The difference between a small spike in yields and one large enough to make the (hugely dogmatic) market panic enough to cause a treasury crash is the pace and scope of liquidation.

Now, no sovereign seller in their right mind would fail to pace their liquidation just slowly enough to keep the market warm. After all, they want to get the most for their assets as they can, and panicking the market would mean a lower price.

But there are two (or three) foreseeable scenarios that would raise the pace to a level sufficient to panic the markets:

  1. China desperately needs to raise dollars to bail out its real estate market and paper over the cracks of its credit bubbles, and so goes into full-on liquidation mode.
  2. China retaliates to an increasingly-hostile American trade policy and — alongside other hostile foreign creditors (Russia in particular) — organise a mass bond liquidation to “teach America a lesson”
  3. Both of the above.

18 thoughts on “The Great Treasury Dumping Game Continues

  1. Paul K says you’re crazy and your models don’t work. US Treasuries will always be the most sought after instrument in the world. He says this idea of bond vigilantes causing a spike in treasuries is as much a fantasy as the confidence fairy. And since he says it, it must be right. Please stop trying to scare people with your facts. Facts have a well-known bias after all…

    • The “bond vigilantes” of old (i.e. corporate and financial investors) have long been placated by shitloads of free QE cash. Krugman is looking in the wrong place.

      The new bond vigilantes are the Russian and Chinese governments.

      Both are reducing their holdings.

      Any wonder why Hillary Clinton wants to take the Arab spring to Moscow?

  2. Sorry guys, both wrong.

    I have decided to go against the crowd. Zero Hedge. Azizonomics, Market Watch. Business Insider, Seeking Alpha, have all been hijacked by paid shills to cause angst and fear in the Retail sector. All market corrections are a deliberate attempt to buy Equities in US and European “Dividend paying” at reduced prices by moving retirees money out of equities and into Bonds.

    I have been keeping track of positive news outside these sources and the results are bullish.

    • Absolutely Buddy. I — alongside my friend Tyler at ZH — am being paid by a group of hedge funds to post bearish news so that they can buy the fucking dip and make a killing.

      Bernanke is the greatest Fed chairman in history, and saved the world from economic disaster.

      I have some coastal property in Oklahoma that posters may be interested in buying.

      • I too have some coastal property in Outback Australia. I mean, the global warming event is true, so it is just a matter of time, that my Google flood maps pay off big time!

        Trust me I am not kidding! In the mean time, I am earning a littler over 10% from meat sheep.

    • I think the entire point of this trade war that I see brewing is to strip America of the petrodollar standard. China and Russia already ditched the dollar for bilateral trade. So the first shot of any true liquidation will be those hostile Eurasian nations I so often talk about ditching the dollar, and convincing their friends (e.g. Venezuela) to do the same. Of course, I expect Bernanke to try and keep pace with the liquidation by taking treasuries out of the open market. But with various commodities skyrocketing, this would have quite a considerable inflationary impact.

    • It’s friday, friday, market’s going down on friday.
      Everybody’s looking forward to the weekend.
      Friday, friday, going down on Friday.
      Everybody’s looking forward to the weekend
      Greek debt? Down!
      Goldman Sachs? Down!
      Down, down, down, down
      Looking forward to the weekend.

      • Crazy hey! I nearly sprayed my Cognac all over my computer screen when I found out who she was.

        Here is a goal for you. Azizonomics has to pip Friday, and no you can’t come up with a song to promote yourself😛

  3. Here is hope for world banking. It appears from the Basel 3 accord, that the idea of resilience (Coping with Black Swan event) is entering the lexicon of regulatory boards around the world.

    In a nutshell, the Residential Mortgage Backed Bonds are treated as lower quality assets for Capital Adequacy Ratios, emphasis on liquidity management in extreme market conditions.

    This means I don’t see the wild lending practices of the 90’s. I was involved in the Basel 2 Project at a major Australian Bank, and back then I was concerned with Off Balance Sheet Investment Vehicles (Securitization of RMBS to earn a fee)

    From Australia’s Prudential Regulatory Authority (APRA)

    http://www.apra.gov.au/adi/Documents/ADI_DP_IBLR_November_2011.pdf

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