Selling US Treasuries ≠ Losing Confidence In the United States19 October, 2011, 13:46. Posted by Zarathustra
Tags: Economy, United States, US Treasuries
Not surprisingly, the fact that the TIC report from the US Treasury shows that China has reduced its holding of US Treasury securities has predictably led to Chinese Media spinning the story to look like China and other countries are losing confidence in the United States of America. This article in Xinhua said “Analysts believe that the reduction of holdings of US Treasuries by various central banks is a vote of no confidence towards increasing budget deficits and debts.”
Reuters points out that central banks in Asia and Russia were the net-sellers of Treasuries, with net outflow of US$6 billion. And predictably, someone blamed the US downgrade:
"These players are sitting on large dollar-denominated assets already so can afford to take a longer view, and at the margin, they would have been the ones most concerned about a downgrade on their current holdings," Woolfolk said.
But the bigger thing happening here is not that other countries are losing confidence in the US. Rather, it is that investors are leaving emerging markets and have been getting back to the US by selling of EM currencies denominated assets. I have pointed out the emerging markets currencies were under pressure in the past month or two, with various central banks in the EM trying to prop up their local currencies. The way they do that is to sell US dollar assets (most probably including US Treasuries) and buy back their own currencies. South Korea has done that in September, Chinese Yuan NDF was pricing in CNY depreciation (while a rare offshore Chinese Yuan CNH discount to CNY occurrence, and a surprise contraction of FX reserve), and even Brazil was selling US dollar. Yesterday, Turkey has stepped up the fight against Turkish Lira depreciation. If this goes on, one should not be surprised that these central banks are cutting holdings of US Treasuries in the future.
So what’s the real thing here? Not really that these central banks are losing confidence in the United States. Rather, they are just trying to defend their own currencies against depreciation against, well, US dollar, perhaps. I have been rather bullish on the US dollar for a while now, and US dollar has been strengthening for the past two months, and that has created problems for emerging market central banks.