The Fed is leading the sell-off of U.S. bonds
As of now, the Federal Reserve has raised interest rates four times this year, with the last two increases being a rare 75 basis points each, not seen since the 1990s. The FedWatch tool estimated a 42.5% chance of a 75 basis point rate hike and a 57.5% chance of a 50 basis point hike at the Federal Reserve's September meeting on August 17th. Over 70% of the Federal Reserve's board members have recently expressed support for aggressive rate hikes.
In tandem, since the initiation of QT (Quantitative Tightening) in June by the Federal Reserve, as of last week, the balance sheet of the Federal Reserve stood at $8.879 trillion. It has decreased by approximately $91 billion from its peak in April, marking the lowest level since February 2nd.
It is observable that after personally halting the dollar printing press that began in 2020, this round of dollar quantitative tightening has exceeded any previous scale.
Despite a slight retreat to 8.5% in July, the U.S. consumer price index remains at its highest level since the 1970s and early 1980s, and is more than three times the Federal Reserve's 2% inflation target.
This further explains why, after the U.S. economy contracted by 1.6% in the first quarter and 0.9% in the second quarter, marking two consecutive quarters of negative growth, the Federal Reserve still chose to aggressively raise rates and reduce its balance sheet. On the surface, it appears that the Federal Reserve is fully addressing the high inflation in the United States, but behind this, it may be that the Federal Reserve, under the guise of curbing inflation, is harvesting the wealth interest differential of the inflated dollar.
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In fact, the Federal Reserve is not the Federal Reserve of the U.S. economy, but a joint institution composed of many banks in the United States, with profit-seeking always being their goal. This is not a timely help for the U.S. economy, which is already at risk of recession and heavily indebted, but rather adds insult to injury.
In this regard, Nouriel Roubini, an economist known as "Dr. Doom" who predicted the 2008 U.S. financial tsunami, warned that, given the most aggressive tightening actions by the Federal Reserve in decades, the United States has only two choices: a hard economic landing or uncontrollable inflation. Either of these choices is a footnote to the quagmire of the U.S. economy and U.S. debt.
For example, in terms of U.S. debt, as of last week, the amount of U.S. Treasury bonds held by the Federal Reserve has decreased by $52 billion from its peak in June to $5.72 trillion, the lowest level since January of this year. This directly indicates that the Federal Reserve sold a total of $52 billion of U.S. Treasury bonds between June and early August over two months.
For the upcoming September, the Federal Reserve originally planned to reduce its holdings of U.S. Treasury bonds by $6.5 billion per month and MBS (Mortgage-Backed Securities) by $3 billion per month, totaling up to $9.5 billion per month. If QT ends by the end of 2023, within this plan, over 16 months, approximately $1.5 trillion of U.S. Treasury bonds may be reduced in total. In other words, the Federal Reserve may sell a total of up to $1.5 trillion of U.S. Treasury bonds in this QT cycle.
During this process, the Federal Reserve will sell U.S. Treasury bonds with different maturities and exchange them for principal and interest payments from the U.S. Treasury. Moreover, this $1.5 trillion scale is already far higher than the $1.2363 trillion held by Japan, the largest foreign holder of U.S. debt.From this perspective, the Federal Reserve, while being the largest holder of U.S. Treasury bonds, also appears to be the largest short-seller of these bonds, especially considering its role as a policy maker for the U.S. dollar as the global reserve currency. It seems that the Federal Reserve might be leading a global trend of central banks selling U.S. Treasury bonds. For the Federal Reserve, it appears that enabling top Wall Street bankers to profit at the right time is their financial mission.
When the Federal Reserve no longer acts as a buyer for U.S. Treasury bonds and becomes the largest short-seller, leading the way in selling these bonds, it further explains why global central banks have continued to sell U.S. Treasury bonds this year. Especially in the second quarter, at least 27 countries sold U.S. Treasury bonds in April, at least 21 countries in May, and at least 14 countries in June. ZeroHedge, a U.S. financial website, analyzes that, particularly as global geopolitical economic risks intensify, there is a certain risk of default on U.S. debt, and some major buyers may decouple from U.S. Treasury bonds.
For instance, the latest development is that, according to the latest report on international capital flows known as TIC (which follows a two-month lag) released by the U.S. Department of the Treasury on August 15, the third-largest holder of U.S. Treasury bonds, the United Kingdom, sold $19.1 billion worth of U.S. Treasury bonds in June. The significant sale of U.S. Treasury bonds by the United Kingdom, a traditional ally of the U.S. economy, surprised the market and indicated that U.S. Treasury bonds are becoming less popular.
This all implies that the U.S. debt-based economic model may face the risk of having nowhere to hedge. The U.S. Treasury has hinted more than once since 2020 that at some point in the future, it might consider issuing 100-year U.S. Treasury bonds. Judging by the expected term of this issuance, apart from the global central banks having the purchasing power, ordinary buyers seem to be deterred.
However, the Federal Reserve today seems to be用实际行动, telling central banks around the world that U.S. Treasury bonds, this core U.S. dollar asset, have potential unreliability. In other words, the Federal Reserve's balance sheet reduction is lowering the international credit of U.S. Treasury bonds. As of August 17, the total U.S. federal debt has approached the astronomical figure of $31 trillion, making the U.S. the world's largest debtor nation. The prosperity of the U.S. economy over the past half-century has been built on a mountain of debt. When U.S. Treasury bonds are no longer favored, the risk of a U.S. debt crisis increases accordingly. The Federal Reserve may thus become the core engine that triggers a U.S. debt crisis.
It is worth mentioning that the latest report from the U.S. Treasury shows that from December last year to June this year, China has sold U.S. Treasury bonds for seven consecutive months, with a total sale amounting to $113 billion. The current holding of U.S. Treasury bonds has dropped to $967.8 billion, touching the lowest level in 12 years for the second time since May this year, when it fell below $1 trillion for the first time since May 2010. China remains the second-largest holder of U.S. Treasury bonds.
On August 16, Chris Turner, the head of global markets at ING, was quoted as saying that China's significant and consecutive sales of U.S. Treasury bonds are beneficial for maintaining the stability of the yuan exchange rate during the Federal Reserve's interest rate hike cycle.
It is even more noteworthy that, upon querying historical data from the U.S. Treasury on Chinese websites, it was found that in November 2013, China held a total of $1.3167 trillion in U.S. Treasury bonds, and over the nearly nine years since then, it has cumulatively sold $348.9 billion worth of U.S. Treasury bonds, with a cumulative sale ratio exceeding 26%.
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