Foreigners Dump US Treasuries As They Liquidate A Record Amount Of US Stocks

In his November Webcast, DoubleLine's Jeff Gundlach warned that as a result of rising hedging costs, US Treasury bonds have become increasingly unattractive to foreign buyers. This can be seen in the chart below which shows the yield on the 10Y US TSY unhedged, and also hedged into Yen and Euros. In the latter two cases, the effective yield plunges from over 3% to negative as a result of the gaping rate differential between the Fed and ECB or BOJ.

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This is also one of the reasons why, as the next chart from Gundlach showed, foreign holdings of US Treasurys have been declining in recent years, and dropped to just over 36% as a percentage of total holdings, the lowest in over a decade, as domestic holdings of US paper have risen to just shy of 50%, and near all-time highs even as the Fed's own holdings continue to shrink thanks to QT.

(Click on image to enlarge)

Which brings us to today's latest monthly TIC data which showed that, as Gundlach would expect, the holdings of the two largest foreign US creditors, China and Japan, declined to new multi-year lows.

As shown in the chart below, China’s holdings of U.S. Treasuries fell to the lowest level since mid-2017 as the world’s second-largest economy sold US reserves to stabilize the yuan which has been depreciating in recent months due to the ongoing trade war.

(Click on image to enlarge)

Chinese holdings of U.S. Treasuries declined for a fifth month to $1.139 trillion in October, from $1.151 trillion in September, a $12 billion decline. Despite the drop, China remained the biggest foreign creditor to the U.S., followed by Japan whose Treasury holdings also dropped by nearly $10 billion to $1.019 trillion, the lowest since 2011.

(Click on image to enlarge)

Investors had been searching for clues whether China is dumping its vast holding of U.S. Treasuries to retaliate against U.S. tariffs, though Beijing has given no indication it’s doing so; meanwhile while the TIC data is relatively accurate, it tends to be revised rather materially which is why it is certainly possible that China's real holdings, when adjusted for valuation and currency changes, are far lower (or higher).

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