Recently, foreign holders of US treasuries have been dumping their holdings more and at record pace. Optimists see it as a temporary fluctuation. Realists warn about structural change.
According to US Treasury data, major foreign holders of US treasury securities have been reducing their holdings by almost $250 billion since March. The pace of dumping has intensified with some $200 billion reduced in just past two months.
In the process, Japan has surpassed China as the major holder of US treasuries for the first time in nearly two years. While the mainland still has some $1,116 billion in US treasuries, it has reduced its holdings by $130 billion in just a year, along with Saudi Arabia ($18 bn), Russia ($13 bn), Turkey ($9 bn), and Norway ($18 bn).
What’s going on?
Temporary glitch or structural change
While some argue that the reductions by foreign holders only reflect seasonal fluctuations, this may no longer be true. Until recently, foreign holdings of US treasuries climbed steadily peaking at $6.280 trillion last June. Since then, they have declined by almost 4 percent (or $240 billion).
Indeed, some observers argue that US treasuries have never been sold so aggressively over a 12-month period.
The most benign scenario is that foreign holdings of US treasuries have plateaued since June 2014 when they first crossed the $6 trillion milestone. The less-benign scenario is that these holdings began a decline last summer – when President-elect Trump won the Republican nomination.
The plunge of US treasuries to less than $6 trillion by January 2017 – especially if the rapid pace of dumping will prevail – would further reinforce such perceptions.
There are obvious reasons for some foreign countries to reduce their holdings. China has been selling holdings to defuse sharper devaluation of the renminbi. Other major sellers – Saudi Arabia, Russia and Norway – are oil exporters, which have sold US treasuries to gain funds to offset the drop in dollar-denominated oil prices and to contain the deterioration of budget deficits.
