China’s Big Treasury Trade: Why The FED will be on the Losing Side!

China is selling Treasuries. According to a report today released by the US Treasury, China sold $32 billion in December, bringing its total to 1.1 Trillion. China sold off over 3% of its Treasuries in December! Under normal market conditions, this would cause a panic in the markets. However, China picked the perfect time to sell.

China has made no secret of its desire to diversify from its holdings of US dollar denominated assets. As the US economic dominance declines, it makes sense to diversify away from assets denominated in dollars like Treasuries. However, China has a problem. It has so many treasures, that at any given time, it can only sell a small fraction of its holdings without causing the value of its existing holdings to fall in value. Until NOW!

Two factors have created enormous demand for Treasuries of all maturities.

  1. The uncertainty in Europe has caused there to be enormous demand for safe assets (short-dated treasuries)
  2. The FED’s operation twist (in which the fed buys longer dated Treasuries) has greatly reduced the supply of Treasuries with 20 and 30 year maturities.

Both of these conditions are temporary. While no one knows when the European crisis will subside, the FED is scheduled to stop buying longer dated treasuries this Summer.

China has found the ideal time to sell. Lets say that these conditions continue for the next six months. In that time, China could rid itself of $200 Billion in Treasuries reducing its holdings by close to 17%. In addition, as treasuries mature, China will not be repurchasing them further decreasing China’s holdings.

There have been a number of articles about this topic today. As always, Zero Hedge has an interesting take:

Russia Dumps Treasurys For 14 Consecutive Months; China Slashes Holdings To Lowest In Over A Year

And if you want the primary source of this information:

TIC Report

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