Emerging market governments are dumping US treasuries en masse, in the latest sign of the pressure their economies are under.
China, Brazil, Russia and Taiwan have all been sellers, accounting for some of the $123bn in foreign net sales of treasury debt maturing in a year. This figure is for the 12 months to July, according to Deutsche Bank, and marks a sea-change in the $12.8 trillion treasury market.
All these countries had historically been big buyers of the assets, using the better times of the last decade to accumulate foreign exchange assets and helping to push yields down to record lows.
Now both Russia and Brazil are facing a prolonged period of recession while Taiwan’s growth is slowing, and their central banks are liquidating those reserves to free up capital for their budgets.
It’s a sign of how far the once-celebrated economies have fallen, and the on-going selling may prove negative for risk assets around the world.
“There is no doubt central banks globally are decreasing the number of assets they have, and that means there is less money around for both governments, and for risk assets,” says Adrian Hull of Kames.
Selling by China has been the source of the most speculation, as the country was an avid buyer of US debt and is still the biggest foreign owner, with a hoard that peaked at $1.3 trillion in November 2013.
Its position is now in reverse. China currently holds $1.240 trillion of treasuries – significantly lower than the $1.264 trillion it held last July, according to the latest US government figures.
There has been much speculation as to why, but China’s selling of treasuries was particularly evident in the weeks after it devalued the yuan.
The chief reason could be that the People’s Bank of China is using the dollars raised from selling treasuries to buy up the yuan and support the currency. This policy has caused its foreign exchange reserves to drop by $315bn in the last 12 months, according to Bloomberg.
“It is all about supporting the currency and the on-going effects of the yuan devaluation,” says Hull.
But some experts believe China’s offloading is simply part of its plans for economic reform. And selling now, while there is plenty of institutional demand, makes perfect sense.
“In five years’ time China’s foreign exchange reserves should be smaller than they are today,” says Helen Zhu of BlackRock. “And if they are going to be smaller, do you want to be selling your treasuries at a time when everyone in the world wants them?
“I’m not at all surprised that they are doing this.”
With the rotation out of treasuries by cash-strapped central banks still on-going, one potential impact could be a spike in treasury yields.
“At the end of the day, price is about supply and demand. And there is going to be more supply,” Hull says.
While a spike in yields has not yet appeared, there are people who think treasury yields should be much lower – given how dovish the Federal Reserve has been. For them, the China effect is already here, in slightly higher yields. “There is a case to be made that treasuries should be lower in terms of yield, and they would be if China were not selling so much,” Hull says.
This turn of events is going to leave bond bears frustrated, argues Neil Williams of Hermes Investment Management.
But some are sceptical of the impact this selling will have on the treasury market, which remains well-supplied with both stock and buyers.
“Will China crush the treasury market? I doubt it,” says Jim Celinski of Columbia Threadneedle. “The numbers are big, but there are other determinants of yield,” he explains.
Indeed, while struggling central banks have been dumping treasuries, there have been some big buyers. India, Germany and Switzerland have markedly increased their treasury holdings, while perhaps more surprisingly the likes of Mexico and Turkey have too.