Late last year, 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 yield went from over 3%, to negative as a result of the gaping rate differential between the Fed and ECB or BOJ.
Then, in January, to underscore just how low yielding US paper is on an FX-hedged basis, we showed that in a world in which there is still approximately $8 trillion in negative yielding debt, the debt instrument which has the lowest, FX-adjusted yields is… the 10Y US Treasury!
This is also why, as the next chart 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.
Which brings us to today’s latest monthly TIC data which showed that, as Gundlach would expect, Foreign investors dumped over $77 billion in US treasuries in December – the most on record – even as yields fell amid the December stock market carnage and the “Mnuchin Massacre”:
Foreign investors also sold stocks and corporate bonds in December, while adding fractionally to their agency holding:
Interestingly, Norway, UK, and Belgium (often noted as a proxy for China buying), along with China and Japan, all added to their US Treasury horde in December.
The big sellers were France, Brazil, and Germany:
One has to wonder, with US Treasury’s funding needs set to soar, as the US faces a $1.1 trillion deficit in 2019, and set to unleash an aggressive borrowing binge, even as the rest of the world dumping US Treasuries if the sudden shock timing of The Fed’s abrupt U-Turn on rates and more importantly the balance sheet normalization are not related to supporting the bond market that America’s hegemon relies upon.
The bottom line: Trump told the world he doesn’t need its generosity to either fund the US deficit or prop up stocks, and according to recent data, the world has taken up Trump on his dare, and has been actively liquidating US securities.
And while that may not be a problem right now, in its latest refunding statement, even the TBAC admitted that it is worried that “foreign investors already hold significant dollar debt” which is why the US will have to increasingly rely on domestic savings to fund its future budget deficits. Ultimately, the question is whether or not the dollar will remain the world’s reserve currency: as long as that is the case, the US will have no problems funding itself. As the TBAC commented two weeks ago, the “USD is still the dominant reserve currency.” The problematic implication, of course, is that it won’t be that for ever.