Photo: Jason Lee / Reuters
China, holder of the world’s largest foreign exchange reserves in 2016 a record reduced investments in U.S. Treasury bonds. Japan, the largest foreign US creditor, reduced its investment for the second year in a row
Outflow of investments
The Central Bank of China has the world’s largest foreign exchange reserves in 2016 a record reduced investments in U.S. Treasury bonds (treasuries), follows from the data published by the American Ministry of Finance on Wednesday, February 15. The Chinese package of the US Treasury totaled $1.06 trillion at the end of December, $188 billion less than the year before. However, in the last month of the year China increased its treasuries portfolio ($9.1 billion compared with November) that was the first time since may. Since 2014, China has spent about a quarter of its foreign exchange reserves to support the yuan, to prevent the flight of capital from the country, according to Bloomberg. China’s foreign exchange reserves shrink for the seventh straight month in January, 2017 the index fell to almost six-year low, $3 trillion, from the data of the Central Bank of China. This is a consequence of intervention by the regulator in the foreign exchange market.
Selling by China of us Treasury securities has led to a rise in the cost of borrowing for the United States — the yield on 10-year bonds in the past year increased from 1.3 to 2.6%. “China is a major player in our market, which depending on their actions sales or purchases — to change the situation,” said Tom di Galoma, managing Director of “sovereign paper and the strategy of” brokerage company Seaport Global Holdings. “If interest rates on ten-year bonds this year will rise to 3%, the reason for this is China.”
In General, the largest creditors of the United States revise its approach to the purchase of U.S. securities, anticipating the increasing budget deficit and inflation with Donald trump or increasing the base rate of FRS of USA, says Bloomberg. Japan, the largest foreign US creditor, reduced its investment in Treasury bonds for the second consecutive year, in 2016, the figure dropped a maximum of nearly four years, at $31, 6 billion of the Japanese package is reduced for the fifth consecutive month in December it decreased by $17.8 billion to $1.09 trillion, data from the U.S. Treasury. “The Japanese becomes more difficult to invest in treasuries and the dollar this year due to political uncertainty, — quotes Bloomberg words of Kent Inoue, chief analyst of investment in foreign bonds investment company Mitsubishi UFJ Morgan Stanley Securities. — Yield of Treasury securities could rapidly off again in the near future that will keep the Japanese from active investments in treasuries”.
In December a net outflow of funds from long-term US securities totaled $12.9 billion of the Total outflows from U.S. securities, including short-term Treasury bills and swaps on shares, amounted in the reporting month $42,8 billion to investors outside the US owned Treasury bills worth $6,15 trillion, or 44% of the market capacity of $13.9 trillion, data from the U.S. Treasury.
It is noteworthy that foreign investors from American securities when they look better than ever, says Bloomberg. From Tokyo and China to London in the reign of the same sentiment — few foreign investors are now willing to invest in the market of U.S. Treasury receipts with a capacity of $13.9 trillion. The safest debt market in the world already seems less reliable, especially in conditions which started in November, increasing profitability of securities. Populist rhetoric trump keeps foreign investors from investing. The risk that all foreign holders of receipts of the U.S. Treasury from them refuses, is absent, but significant sale of bonds will hit them the largest holders — Japan and China — with the same effect as that of the U.S., says Bloomberg. The demand for receipts by U.S. investors in recent times compensates their sales by foreign holders. After the yield of the securities in mid-December made up 2.64%, figure dropped this year practically did not grow. On Thursday, February 16, he was 2.43%.
The long-term consequences
Prolonged weakening of foreign demand for us securities can affect the ability of the U.S. to borrow cheap money, especially in light of ambitious plans of the trump to increase spending on infrastructure, cut taxes and implement other parts of its strategy, “America first”. The President has already managed to criticize Japan and China, the biggest foreign creditors of the United States and Germany for the weakening of the national currency with the purpose of gaining unfair competitive advantages over their trading partners.
Even now, are cautious buyers of American bonds, as Shinji Kunibe, head of the Department for investments in fixed income instruments of investment company Daiwa SB Investment, reduce investment in the receipts of the U.S. Treasury, despite a number of obvious advantages.
Less cost of hedging the yield on 10-year bond is about 0.9 percent — ten times higher than the yield on Japanese bonds. Over the last thirty seven years it is rare when Treasury yields so superior to the comparative rate Japanese government bonds.
The yield receipts will continue to grow as trump will sell their stimulating fiscal policy and to adopt protectionist measures to protect the trading interests of America. “Yields will increase,” — concludes Kunibe.
Investors can’t afford large losses on their investments. In the fourth quarter, losses the Japanese investors, who have insured the risks of all their dollar investments in U.S. government bonds was 4.7% — the highest in at least 30 years, data from Bank of America. European investors have also suffered record losses. “All enveloped animal panic”, — said the Agency Zoltan the Fire, an analyst at Credit Suisse.
The unpredictability of the policy of trump, as well as the increase in the base rate, the US could weaken demand for us assets. According to Mark Dowding, invest-Manager of the London company BlueBay Asset Management, the firm has already taken steps to hedge against further losses from a possible increase in the key rate.