Thursday, 19 July 2018

Russia Liquidates Its US Treasury Holdings

Russia just DUMPED $80 billion in US debt

The US Treasury published a report naming those countries that are the largest holders of US bonds. The list includes 33 countries, and for the first time Russia is no longer in it.

Paul Goncharoff


18 July, 2018

Russia has stopped “inching towards de-dollarization” as I wrote about on July 3rd, and has now energetically walked out of the list of largest holders of US government bonds, hence this update. For the two months ending in May 2018, Moscow has offloaded more than $80 billionin US Government debt obligations.

The $30 billion “minimum” listing Rubicon has been crossed by Russia.
As of the end of May, Russia had bonds worth only $ 14.9 billion. For comparison: in April, Russia was on the Treasury list with bonds totaling $48.7 billion. Even then it was offloading US$ debt securities as Russia owned in March over $96 billion. At the end of 2017, Russia had US treasury securities worth $102.2 billion. It is anyones guess what Russia will own when the June and July figures are released in August and September – probably less than today.

This simply serves as a confirmation that Russia is steadfastly following a conservative policy of risk diversification in several areas such as financial, economic, and geopolitical. The US public debt and spend is increasingly viewed as a heightened risk area, deserving sober assessment.
So where have all the dollars gone? The total reserves of the Russian Central Bank have not changed and remain at approximately the equivalent of $ 457 billion, so what we are seeing is a shift of assets to other central banks, other asset classes, just not US$ government bonds.
During the same time (April-May) as this US$ shift happened, the Russian Central Bank bought more than 1 million troy ounces of gold in 60 days, and continues.
For comparison sake, the maximum Russia investment in US public debt was in October 2010 totaling $176.3 billion. Today it is $14.9 billion.
The largest holders of US government bonds as of May are China ($ 1,183.1 billion), Japan ($ 1048.8 billion), Ireland ($ 301 billion), Brazil ($ 299.2 billion), Great Britain ($ 265 billion).
Using the similar conservative metrics that the Russian Central Bank has been rather successfully applying through this geopolitically and economically challenging period with the US and the US Dollar, it may not stretch the imagination too much that other countries such as China may eventually follow suit. Who will finance the debt/spend then?
Russia Liquidates Its US Treasury Holdings
18 July, 2018


Last month we showed that as Trade Wars began in April, the world's central banks and other official institutions dumped more Treasuries than in any month since January 2016, some $48.3BN, perhaps over concerns of others selling first, and precipitating a sharp move higher in yields. Fast forward one month later to May, when according to the latest just released Treasury International Capital (TIC) update, in May the selling of Treasurys by official entities continued, with another $24BN sold in the month of May, when yields continued to rise and eventually hit the 2018 highs of 3.11%.


But while the selling of Treasuries was to be expected - after all someone had to sell aggressively to push yields sharply higher in April and May - the question was who.

What we showed last month, is that contrary to some speculation, it wasn't Beijing, because after shedding a modest $6BN in April, China actually bought $1.2BN in Treasurys in May, leaving its holdings largely unchanged over the past month.


And while Japan did sell $12BN in TSYs in April, it more than made up for its in May when it purchased $17.5BN, bringing its total to $1048.8BN in May, which means that over the past two month, Japan was a net buyer of US paper.


Meanwhile, the third most prominent holder, hedge funds, aka "Cayman Islands", bought for a second consecutive month, adding another $5BN.

* * *
So if the usual suspects were buying, who was selling?

Here is the answer.


Readers may recall that last month we first reported  that for all the confusion about sharply higher yields in April, the explanation was simple: it was Vladimir Putin who liquidated a whopping half of Russia's Treasury holdingswhich declined by $47.4BN to just $48.7BN - the lowest since 2008 - from $96BN in March.

But wait, it gets better, because as Trump continued to jawbone about more sanctions targeting Russia, Putin did not stop and in May he continued what was an outright liquidation of Russia's TSY holdings, which plunged by another $40BN, or 82%, from $48.7BN to just $9BN in May. Keep in mind this was over $100BN at the start of the year.

It appears that When Putin warned he would diversify Russia's state reserves  -out of Treasurys - he was serious.

And this is what a very politically motivated liquidation of Treasury holdings looks like.


In other words, in just two months, Russia sold a whopping $81BN in treasurys, a liquidation flow that was likely responsible for much if not all the blow out in rates over the period. Because what else happened as Russia was liquidating 85% of its Treasury holdings in 2 months? 10Y yields soared from 2.7% at the start of April to the 7 year high of 3.11% in late May.

At that point, yields tumbled again as traders freaked out over Trump's escalating trade war with China, and proceeded to rush into deflationary safety. 
So just like last month, we can't help but wonder - as the Yuan-denominated oil futures were launched, trade wars were threatened, and as more sanctions were unleashed on Russia - if this wasn't a dress-rehearsal, carefully coordinated with Beijing to field test what would happen if/when China also starts to liquidate its own Treasury holdings.


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