• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Energy

Why These Countries Are Dumping U.S. Treasuries and What It Means for the Dollar

Data has been decent, but is showing signs of softness as the demand collapse in the rest of the world feeds into U.S. data.
By MALEEHA BENGALI
Oct 17, 2018 | 06:52 AM EDT
Stocks quotes in this article: TLT

U.S. Treasuries slumped in September, as the 10-year Treasury yield breached 3.2% -- worrying investors that rates would shoot too high to a level that could cause equities to reassess their valuations. If yields rise as a result of economic growth, it is deemed positive for equities. However, any sudden or relentless move higher on the back of inflation worries or aggressive tightening financial conditions, equities take as a headwind -- and investors get worried. But there is something more sinister behind the move seen in U.S. bonds in September.

According to the latest published data, China and Japan dumped U.S. Treasuries the most in August. China reduced its holdings for the third straight month, and its holdings are off from the peak seen in 2017. Japan became a seller in August, with its holdings now at the lowest level since August 2011 and Saudi Arabia were buyers of U.S. debt in August. The broader trend has been clear in 2018. China, Japan and Russia are all sellers vs. Saudi Arabia as buyers. This has driven the global share of USD reserves to its lowest since 2013.

Russia's central bank has sold some $85 billion of its $150 billion holdings of U.S. assets from April through June, as the U.S. placed sanctions on its country and businesspeople. According to the recent data released by the International Monetary Fund (IMF), the percentage of U.S. national currency in the global central bank reserves declined to 62.3% in the second quarter, while holdings in the euro, yen and yuan gained as allocations changed.

Given the focus of U.S. foreign policy, it is no surprise to see these numbers -- nor the trends. The U.S. is alienating its trading partners and forcing them to tie up with others to re-establish their alliances. As there is a pickup in yuan trading in gold, oil, and metals, it is no surprise that Trump is hell bent on trying to cripple China as he fears their growth and regional dominance following the One-Belt-One-Road initiative.

Foreign policy aside, this has greater implications for the dollar than meets the eye. In the big-picture view, the world is moving away from the dollar. The wheels are in motion. What is supporting the dollar right now is that the U.S. central bank, with Fed Powell as its chair, has maintained a "gradual rate hike" interest rate policy path.

The data clearly warranted it all of this year and has led the rally in the USD vs. most developed market currencies. As the data gets softer and inflation stays contained, some argue that the Fed may be closer to its neutral rate than most think. Now that would surprise a lot of traders and economists if it were to be the case. The market is certainly very long the dollar right now.

Wednesday night, we have the FOMC minutes released from the U.S. Federal Reserve's latest policy meeting. The market waits eagerly to see if there are any hidden clues as to the timing and pace of future rate hikes. We all know President Trump is "angry" at the Fed, as they seem to derail his plan to nudge the stock market to all-time highs -- claiming "victory" and support going into U.S. mid-term elections. Since when do stock market gains imply a solid presidency?

Trump blaming the Fed raising rates too fast is the perfect alibi to have a scapegoat, if there were to be a collapse. Sure, there is no blame whatsoever applied to Trump's rash foreign policies, unnecessary and taxing trade wars and tariffs to coerce partners to give into the "Make America Great Again" way. Not to mention imposing sanctions on countries, limiting the free exchange of raw materials and goods, all of which is causing prices to spike -- leading to higher inflation, which in turn kills demand and growth.

Stepping away from playing the blame game, perhaps the Fed has the perfect excuse now as long-term consumer inflation expectations has been softening, and there are no signs "inflation is overheating."

Data has been decent, but is showing signs of softness as the demand collapse in the rest of the world feeds into the U.S. data, as well. The market has already priced in a rate hike for December, but any change in expectations for 2019 (more dovish wording) will be USD negative.

Everyone is positioned long, so this will come as a surprise -- but a pleasant surprise, as the market will rejoice in the "lower for longer" mantra and buy risk assets again. Forgetting the 40% correction in some emerging markets, even the U.S., following its 15% correction in quality stocks, looks mouth-watering. Watch the dollar, as it will be the key to the performance of all asset classes. Going into the FOMC minutes and subsequent Fed meetings, U.S. bonds look like an attractive risk-reward on the long side -- via the iShares 20+ Year Treasury Bond ETF  (TLT)  -- as the aggressive selling of the past month subsides.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Bengali was long TLT.

TAGS: Investing | Global Equity | Rates and Bonds | Markets | Treasury Bonds | Energy | Emerging Markets | Economic Data | Commodities | China | Bond Funds | Futures | Economy | FOREX

More from Energy

Stay Away From These Types of Stocks, They're Radioactive

Jim Collins
Mar 24, 2023 2:35 PM EDT

Here's what you're better off buying. I certainly have.

Don't Be Lured Into the Nasdaq Trap

Jim Collins
Mar 23, 2023 5:31 PM EDT

Here's why I'm avoid tech stocks and snapping up preferreds.

An Energy Play With Long-Term Upside Potential

Bruce Kamich
Mar 22, 2023 8:20 AM EDT

The charts suggest a big move could unfold.

Bearish Bets: 3 Stocks You Should Consider Shorting This Week

Bob Lang
Mar 19, 2023 10:30 AM EDT

These recently downgraded names are displaying both quantitative and technical deterioration.

Here's Why I'll Have the Last Laugh in This Market

Jim Collins
Mar 17, 2023 3:14 PM EDT

Let's take a journey through time, starting with April Fool's Day, 2021, and see where we've come, and how I've been handling it.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 01:56 PM EDT PETER TCHIR

    Very Cautious

    I am very cautious here. I don't like how the c...
  • 08:58 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    How to Adjust Your Trading Style as Market Conditi...
  • 05:00 PM EDT CHRIS VERSACE

    AAP Podcast on the Fed Decision!

    Listen here!
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login