Japan surpasses China as largest foreign holder of US Treasurys

https://www.cnbc.com/2019/08/15/japan-surpasses-china-as-largest-foreign-holder-of-us-treasurys.html

by hker • 7 years ago

260 136 7 years ago

40acres• 7 years ago

Most U.S Treasuries are held by American citizens, it's why fiscal hawks are always ranting that defecit spending "bankrupts our kids", foreign holdings are insignificant in the grand scheme, and as noted the largest holders are all allies.

cobbzilla2• 7 years ago

Wikipedia has foreign holdings at 28% and growing as of 2008 [1]. That’s enough for bargaining leverage in many situations.

[1] https://en.wikipedia.org/wiki/National_debt_of_the_United_St...

khuey• 7 years ago

If the entire world pooled their holdings, yeah, sure.

nradov• 7 years ago

Which situations?

_ptgt3• 7 years ago

What does this have to do with anything? The problem with too much US debt is that we have to make interest payments on that debt, which now makes up ~10% of the annual budget (or about $400B/yr). That's expensive and going to get worse if we continue borrowing at unsustainable rates. It's also going to get a lot worse if investors start to worry the US might default on its debts and demand higher yields on return.

I'm not sure why you think it matters whether China or Europe is holding the debt.

phil248• 7 years ago

A friend may work with you to negotiate terms, even at their own expense. A rival may use it against you in pursuit of their own benefit.

arcticbull4• 7 years ago

What does this have to do with anything? The problem with too much US debt is that we have to make interest payments on that debt, which now makes up ~10% of the annual budget (or about $400B/yr).

That may matter to you as an individual but governments get to print money. It's like if I issued IOUs denominated in Steve's Funbucks that I'm the sole issuer of, and those IOU holders lived across the ocean and also I had half the world's armed forces at my disposal. Then when things went sideways I fired up the Epson and paid you off. As it turns out inflation is not directly connected to the issuance of new money, although it does contribute. Balancing a federal checkbook isn't the same as your home finances.

I'm not saying you should go to town and print a ton of money and that nothing would happen, I'm saying it can play a role and isn't directly equatable to small-scale finance.

(Edit) further, borrowing to create economic activity is not zero sum. If you borrow 100K and create a business worth $1M, and reap the tax returns, it doesn’t matter how much you owe. If I borrow $1T and create a $5T economy, I doubt the kids will mind. This is in part why the money supply increases over time — to reflect the new scope of the economy.

The only material risk of taking on debt is that you need to create returns in excess of your interest payments.

JMTQp8lwXL• 7 years ago

If negative rates hit the U.S., wouldn't that further incentivize the government to issue debt, since investors would be paying the government for the privilege to hold their money?

panarky2• 7 years ago

if investors start to worry the US might default on its debts

If investors are willing to lend to the US for 30 years at 2%, doesn't seem like they see much risk of default.

ngold• 7 years ago

The entire point of the United States is protecting the dollar as the defacto currency for the world's trade. As long as that holds true the amount of created money is largely integers on a screen that get added and subtracted with little consequence.

So far.

legulere• 7 years ago

The alternative is to use public private partnerships for doing projects. The costs are higher interest rates that companies have to pay for getting a loan and having a part of the project money set aside for the profit of the companies.

navigatesol3• 7 years ago

What does this have to do with anything? The problem with too much US debt is that we have to make interest payments on that debt, which now makes up ~10% of the annual budget

Where are those debt repayments going? The majority go to US citizens. That's the point. Government debt are assets (read: wealth) to the owners of the bond.

It's astonishing to me how many times people fail to look at both sides of an economic transaction. It's like Ray Dalio talking about China weaponizing their treasury holdings yesterday. Yeah, China is going to "hurt" the US by selling bonds it bought for $1000 to someone else for $700. Who does that hurt again? Not the US; the debt repayment remains the same, no matter the holder.

It's also going to get a lot worse if investors start to worry the US might default on its debts and demand higher yields on return.

You're missing a part of the logic here: interest rates are low because there is high demand for these instruments. It's easy to talk about some hypothetical scenario where people "demand" higher returns[1], but in reality, people the world over are lining up for US debt and many other investments that pay far less than treasuries (speculative equity, for example). Creditors don't get to choose their returns; they are at the mercy of those putting the capital to work.

[1] I'm sure you, as do I, want higher returns right now. How do you intend to demand this?

ThrustVectoring3• 7 years ago

That's pretty funny, since a trivial analysis of the flows of real goods and services will show that your kids are going to almost entirely consume the real goods and services that they produce.

No, what excessive deficit spending does is generate an excess of financial assets that lay claim to the same pile of goods and services. This makes the financial assets less valuable, reducing the ability for current savers to trade their assets for today's real goods and services. This is through a combination of an increase in interest rates (reducing the value of bonds) or through outright inflation.

Another way of thinking about it: the supply of real goods and services is relatively fixed, so what happens when the government consumes more today? Somehow this needs to reduce the real goods and services consumed by society, and that can only happen in a few ways: involuntarily through taxation, involuntarily through loss of purchasing power due to inflation, or voluntarily through selling more attractive financial assets.

maxerickson• 7 years ago

The supply of real goods is anything but fixed.

On my side, I have evidence like the global population doubling while poverty plummeted.

There's still lots of people without enough to eat, but 30 or 40 years ago was a completely different story, it was much worse.

pjc50• 7 years ago

Part of the argument of Keynes was observing that supply is not at all fixed, there is idle capacity - unemployed people and idle physical capital. Production can be increased without inflation up until "full employment" is reached.

nabla9• 7 years ago

Estimated Ownership of U.S. Treasury Securities (From Fed Bulletin)

$22T - Total Federal securities outstanding

$9T - Federal Reserve and Government accounts + State and local governments including pension funds

$2T - Mutual funds

$2T - Depository institutions, private pension funds, insurance companies.

$3T - Other domestic investors. Includes individuals, Government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors

$6T - Foreign and international

spectramax• 7 years ago

I am not familiar with Treasuries, I'd appreciate some insight into what this means "China has been a less aggressive buyer of the U.S. sovereign debt". How is it possible to "hold" (buy) another country's debt?

thoughtstheseus3• 7 years ago

The U.S. govt. holds a sale of treasuries every so often and people/entities buy them. Nothing special about it. They're high quality and liquid assets so they can be frequently found in many investment portoflios and balance sheets (essentially as good as cash).

codesushi42• 7 years ago

"China has been a less aggressive buyer of the U.S. sovereign debt"

It means China is dumping US debt. Which will mean a surge in interest rates, a weaker US dollar, and in a nightmare scenario, hyperinflation.

_0ffh• 7 years ago

It means China is dumping US debt. Which will mean a surge in interest rates, a weaker US dollar, and in a nightmare scenario, hyperinflation.

But then again, the popular wisdom seems to be that a weak currency supports exports. So I don't know that this is clearly a bad thing. Hyperinflation I would peg to be usually caused by a break down of the domestic market.

ChrisLomont• 7 years ago

The article states China’s holdings are still increasing, the opposite of dumping. Japan is simply increasing faster.

b_tterc_p• 7 years ago

Wouldn’t that deeply hurt the Chinese economy as their boost from their currency inflation goes away

rolltiide• 7 years ago

Free markets mean any market participant can buy anything. Just like you log on to Robinhood and buy stocks or bonds, one of those users is the Government of Japan.

This is really only slightly simplified as they wouldn't use Robinhood, but they could. Convenience improvements work for all market participants.

Synonyms to save you time understanding this market:

Government bonds = sovereign debt = (when US federal bonds are the context) US treasuries aka US treasury bonds

Fixed income = the market of bonds = credit markets

Junk = not "investment grade" bonds = high yield, but doesn't mean "junk, bad investments"

geofft2• 7 years ago

Not an expert, but I believe it means that the country owes you money, to be paid back on some schedule, and in particular you can re-sell the object-that-says-you're-owed-money to other people and therefore there is a market value for it. It's like holding a mortgage - if I get a mortgage on a house, I owe the value of the mortgage to my bank, but only slowly. My bank can then resell the mortgage to another bank, who becomes the holder of the mortgage. They're owed money by me, which is good if they think I'm creditworthy and the interest rate on the mortgage is profitable for them, and bad if not. You might want to sell a debt to someone else if you want some fixed amount of money now instead of a greater, probably riskier amount of money in the future.

basementcat2• 7 years ago

You can point your browser to treasurydirect.gov sign up and transfer some funds and hold your own little piece of USA government debt!

patio11• 7 years ago

I'll give you the geek-friendly oversimplified version:

The U.S. government issues several varieties of securities, informally referred to as "Treasuries." Substantially anyone can own one; you can buy one directly from the US yourself (treasurydirect.com) or from any of a host of financial institutions, which both hold them for their own account and resell them routinely.

Because the US is so central to the international economy and so good a credit risk, there is an active market and infrastructure for holding Treasuries substantially everywhere. How good credit is the US government? Well, for a variety of purposes it is useful to have the notion of a "risk-free rate of return", and whatever the US is paying on treasuries is assumed to be that rate. (This is assumed to be risk-free because the US knows that default on treasuries would be cataclysmic and would do anything to stop it, and one of their options is creating more money and using it to repay treasuries as they come do, which has consequences but is not a default.)

Governments routinely hold debt securities of each other. This gets complicated, because the thing you think of as "the Japanese government" is both a) distinct from other things you might think of when you think of Japan and b) actually comprised of thousands of units that could in principle beneficially own a treasury, but the overwhelmingly most likely one by dollar weighting is the Bank of Japan as opposed to e.g. Ogaki City Hall (which could purchase a treasury on any Tuesday from anyone presently owning them, which includes every financial institution Ogaki City Hall has an account with).

The Bank of Japan does not purchase most of its Treasuries on the secondary market; they get originally issued Treasuries at auction. The Treasury runs auctions regularly: https://www.treasury.gov/resource-center/data-chart-center/q... Governments and very large financial institutions, the kind which make transactions denominated in billions of dollars, participate in the auction; the Treasury awards the newly created securities to the bidders with the most competitive (cheapest for the US) bids.

After the securities are issued and released onto the market via the auction, they are tradeable. The secondary market (technically, MANY secondary markets) for treasuries is the most liquid market for any security in the world. Large institutions, small institutions, etc etc buy and sell billions all day every day.

As it gets farther from J.P. Morgan Chase and closer to e.g. individual HNers, it is more likely that a retail investor is purchasing a Treasury either not-terribly-competitively from whomever they hold an account with and/or they're purchasing financial services from an intermediary who owns a lot of treasuries themselves either directly on the behalf of their account holders or indirectly. For example, a mutual fund could easily have hundreds of millions (all beneficially owned by fund holders), or a bank might be paying interest on their checking accounts while keeping a substantial amount of treasuries on the bank's own account. (The checking account holder doesn't have direct exposure to the treasuries.)

Make sense?

anon9001• 7 years ago

Now do the yield curve!

Seriously though, that was a great explanation.

SllX• 7 years ago

Near as I can tell, and I’ve checked on this infrequently over the past few years, Japan’s holding of US debt have always been within spitting distance of China’s, where spitting distance is a few hundred billion give or take. So the news in itself isn’t surprising.

That is to say, I think it would be a mistake to read much into this. The largest share of Federal debt is held domestically, really the lion’s share. China and Japan are generally within the trillion dollar range, and are always #1 and #2 foreign holders of US debt.

arcticbull4• 7 years ago

To my knowledge China has intentionally be reducing its holding of US treasuries as part of the ongoing trade... kerfuffle. Yes, China and Japan are usually close, but this delta was closed not because Japan bought more T-bills but because China sold theirs off over the last few months, and is continuing to do so. They're down to the lowest level of holdings since 2017. [1,2,3]

To your point the majority is held domestically but this does create pressure on the instruments at the margins and raises the cost of borrowing both now and over time. Some of that is being masked now by the flight of capital to safety, particularly domestically, over concerns of the same recession.

Less buyers of T-bills raises interest rates, which in turn raises the cost of borrowing money, which in turn pushes down equities. I doubt the Chinese could sell off their T-bills any faster without risking de-valuing their holdings. With that said, I doubt their holdings go up until this trade war ends, if ever, and this will prove problematic once the dust settles. A worst-case scenario for the US is higher interest rates [wiping out current bond investors] combined with lower equities [wiping out current stock investors]. This yields inflation and removes the levers of economic control from the federal reserve -- it could be devastating.

[1] (May) https://www.bloomberg.com/news/articles/2019-05-15/china-s-u...

[2] (June) https://www.bloomberg.com/news/articles/2019-06-17/china-cut...

[3] (July) https://www.scmp.com/business/companies/article/3018924/chin...

panarky2• 7 years ago

raises the cost of borrowing

Long-term interest rates are lower now than in recorded history.

flight of capital to safety, particularly domestically

Is there any evidence that domestic demand is stronger than foreign demand?

over concerns of the same recession

Europe is much closer to recession than the US. Maybe they're the marginal buyers of US bonds and driving down rates?

German manufacturing just fell off a cliff. European banks are in crisis. European bonds have negative rates from 3 months to 30 years, while US bonds still have a positive yield. The dollar is strengthening.

A worst-case scenario for the US is higher interest rates

This is a bizarre conclusion given dramatic and relentless reductions in US rates, and negative rates in Europe and Japan.

I'd say the worst-case scenario is if rates go negative in the US and policymakers lose the ability to stimulate in response to recession. Zero and negative rates push the pension crisis into catastrophe. Then US and global economies turn deflationary at the same time. Very difficult problem to fix.

javert2• 7 years ago

A worst-case scenario for the US is higher interest rates [wiping out current bond investors] combined with lower equities [wiping out current stock investors]. This yields inflation and removes the levers of economic control from the federal reserve -- it could be devastating.

I think "wiping out" is grossly overstated, but setting that aside... why do you think this yields inflation and removes the levers of economic control from the federal reserve?

I have the opposite conclusion, but I'm not sure.

It seems to me that if rates are higher and stocks are lower, that should make both of those more appealing investments, which would cause more dollars to flow into financial assets. Which would continue the existing trend whereby the financial world soaks up the excess dollars and very little of it gets into the "real economy" where it would increase wages of workers and cause inflation.

gscott• 7 years ago

I believe China has less money to buy Treasury's because they need to use the dollars.

The One Belt One Road contractors that are not Chinese want dollars. https://www.economist.com/business/2017/08/03/western-firms-...

They are using dollars to pay down dollar denominated debt.

https://www.axios.com/china-business-debt-trade-war-yuan-dol...

China’s Banks Are Running Out of Dollars

https://www.wsj.com/articles/chinas-banks-are-running-out-of...

But to contradict myself China has been buying a lot of gold https://markets.businessinsider.com/commodities/news/china-b.... But if they are buying it from Russia then they are probably partly paying in Yuan.

dmix2• 7 years ago

How long are these debt/bond terms usually? Would Japans large 80s boom still be playing a role in their debt ownership or is it all new debt that they keep buying?

niij• 7 years ago

T-bonds are a maximum of 30 years, so no. There could be a few months left where they could potentially be holding from 1989, but not a major component.

Bud3• 7 years ago

Headline should be "Treasuries". What the heck, CNBC. You're a financial network. You can't spell "treasuries"?

sb057• 7 years ago

https://www.cnbc.com/id/32462271

The short answer is that the "misspelling" is on purpose, done to differentiate Treasury bonds from the plural for the Department of Treasury, though I'm not sure why you'd ever need to pluralize that. In any event, a number of business news organizations, including CNBC, use the "Treasurys" spelling.

javert2• 7 years ago

Seems like they are in step with the times.

Brawndo: it's what plants crave.

Bud3• 7 years ago

That makes no sense at all. There is no plural for the "Department of [sic] Treasury", which, btw, is called the Department of THE Treasury.

So if it's done on purpose, that's even more idiotic.

anm89• 7 years ago

Treasurys? Is that a valid spelling? I always assumed it was treasuries.But I'm assuming they didn't forget to prrof the headline?

geofft2• 7 years ago

Answered in https://news.ycombinator.com/item?id=20721467 - seems to be their house style, cf. https://www.cnbc.com/us-treasurys/

JumpCrisscross4• 7 years ago

It’s a proper noun. Treasurys are lots of bonds. One with treasuries has, I don’t know, chests of silver?

rayanami• 7 years ago

People who are more in the know - is this likely to be part of a long-term trend or is this a short term reaction to recent US-China relations?

largbae2• 7 years ago

As I understand it, other countries' "belief in our debt" has little to do with their treasury holding levels. All countries that net export products to the US tend to end up owning T-bills proportionate to their export surplus. This is because their banks end up with a bunch of US-Dollar-denominated cash from exchanges by the exporting companies, and getting a return of even 1.5% (our 2-year interest rate) is better than 0% on cash.

The treasury level rising and falling is not usually intentional or by itself sinister, merely a byproduct of a fluctuating export surplus.

This article has a nice illustration of the process:

https://www.theatlantic.com/business/archive/2011/03/infogra...

eof• 7 years ago

One does not follow from the other. Your explanation would only make sense if the only two choices are keep cash or buy US debt.

Of course their holdings have to do with their belief in US debt, those dollars could be spent on many things.

qroshan2• 7 years ago

You have to be careful about that sentence. The only other options is to sell $ for another currency.

Anything that they buy things that are denominated in $ are usually US imports hence goes back to the net export calculation.

Of course they can also use to buy global commodities like Gold, Oil which are denominated in $$, but that is just a proxy for selling $ in foreign exchange and using that currency.

So, logically only 2 options. Sell US $ in FX or buy US assets (Bonds, Stocks, Real Estate)

qroshan2• 7 years ago

They can always sell dollars in foreign exchange for other currencies, local currencies or gold or bitcoin.

The reason they hold $ is a 'belief in our currency won't inflate' (by monetizing debt) which implies 'belief in our debt' If China is a net exporter to Argentina or Venezuela, rest assured they are selling those currencies as fast as they can

option_greek• 7 years ago

Actually they don't even let them settle in their own currency. Almost all of the global trade happens in dollar or euro or yen. Even loans between countries happen in these currencies along with interest payments.

joe_the_user• 7 years ago

It's not a belief our currency won't inflate, it's a belief our currency won't inflate or lose value any more than other vehicles.

Note that even gold "inflates" through the production of gold mines - and gold miners produce more as the price of gold (in dollars or equivalents) rises so mining serves as a check on the relative value of gold.

beijou• 7 years ago

This wouldn't make any difference, it just means someone else now holds those same dollars. The existence of the dollars as an export surplus means someone is going to hold those treasries. At least until they are used to buy US exports - the only way bringing those dollars back domestically.

It goes further because it basically means a country is likely to be in deficit if these surplus dollars lay around somewhere - Twin Deficit Hypothesis.

vaguesortof• 7 years ago

Wish that article finished with why this is good or bad for America, what real effects it has..

jjeaff• 7 years ago

I can tell you some reasons it's not bad.

You commonly hear about how we are indebted China or whoever and because of that, they wield power over us.

This isn't loan shark style debt. The US holds all the cards in this case. It's sort of like, the mantra, "if you owe the bank millions of dollars, it's your problem". If you owe them billions, it's their problem.

The US could even pay back that debt with money they themselves issued if needed.

billions• 7 years ago

Soon you'll have the option to choose the currency of choice for your savings account (Cryptocurrencies included)

Gustomaximus2• 7 years ago

I have that with my trading account but I can't see banks offering that as standard. There's too much risk to open this widely.

peter303• 7 years ago

They are small players compared to the Social Security Trust Fund and the Federal Reserve Quantitative Easement holdings. Both of those total six times Japan or China.

datumy• 7 years ago

I believe the real reason why China is no longer the largest holder is that, China SPENDS tons of dollars she earns/holds on one-belt-one-road projects. US and western countries are super unhappy about that, as China effectively de-weaponize dollars. China is supposed to earn/hold US paper money and never to spend it. Just my 2cents.

runeks4• 7 years ago

Owning a piece of infrastructure definitely seems more valuable than owning a foreign government bond. But I don’t see how this “de-weaponizes” the US Dollar.

marcosdumay• 7 years ago

China seems to be having a huge capital flight. It has just removed the peg on their currency price, what is a large giveaway. It's perfectly natural that foreign currency reserves stop increasing or even decrease.

Japan surpasses China as largest foreign holder of US Treasurys

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