On December 24, the latest US inflation indicator core PCE price index favored by the Fed slowed less than expected in November, making the market's expectations for Fed Chairman Powell to remain hawkish. This is pushing some investors to correct the further rise in US bond yields . This may be an unwelcome development for the already hard-hit US Treasury bond and fixed income markets.
According to the latest 13F Institutional Position Report disclosed by the U.S. Securities and Exchange Commission on December 24, currently, the positions of U.S. debt of some large U.S. investment institutions are close to zero. In the past week, U.S. debt has been violently sold by investors for four consecutive days.
analysis shows that with U.S. inflation still too high for the Fed to accept and the U.S. economic recession emerging, the risk of holding U.S. debt continues to increase, while yields are relatively weak. What this reflects is that the Federal Reserve is actually using high inflation and continued watermarking to dilute interest costs.
According to the analysis of the US financial website Zero Hedge on December 26, this is equivalent to an implicit default on US bonds. Although the Federal Reserve has raised the benchmark interest rate to 4.50%, it still cannot turn the real yield of US debt into a positive value after adjusting for the inflation rate. This also means that high inflation hedging that far exceeds the yield of US debt has reduced the cost of US debt issuance.
Therefore, this explains why the latest international capital flows report released by the U.S. Treasury Department on December 16 will show that the amount of U.S. debt held by global official institutions fell to the lowest level since May last year for the second consecutive month to 7.18 trillion U.S. dollars. At the same time, global funds have heavily sold off a record 285.9 billion U.S. dollars of U.S. stocks, setting a new historical record.
It is worth mentioning that a report released by the U.S. Treasury Department showed that 21 official institutions among the 38 major overseas holders of U.S. debt sold U.S. debt on a net basis, with Japan, China and the United Kingdom selling the largest amounts (please refer to the figure below for specific data details).
For example, Japan, as the largest overseas buyer of U.S. debt at the cornerstone level, sold 158.1 billion U.S. debt in a row in the four months to October, among all overseas U.S. debt creditors. The selling was the strongest, with 's holdings of falling to the lowest level in three years to $1.078 trillion (please refer to the chart below for specific data details). Because there is a two-month delay in U.S. debt data, analysis shows that Japan's U.S. debt holdings may have fallen below one trillion U.S. dollars by now.
At the same time, China has continued to sell off U.S. debt on a large scale. In October and September this year, it sold 24 billion and 38.2 billion U.S. debt, respectively. From December last year to June this year, China sold U.S. debt for seven consecutive years. It sold a whopping 113 billion US dollars of US debt in a month, causing its US debt position to drop to US$909.6 billion, once again setting a new low in 12 years (please refer to the figure below for specific data details). China's current position has been less than one trillion US dollars for 6 consecutive months. However, it is still the second largest overseas US debt creditor.
analysis shows that as the peak of the Federal Reserve’s benchmark interest rate will climb to 5.1% in 2023 beyond expectations, U.S. bond yields may rise again to the 5% range, which indicates that in the next few months, the U.S. Treasury yield will rise again to the 5% range. There are expectations that bonds will continue to be sold off sharply, and trading liquidity will shrink. Therefore, we will also see global central banks data reports on selling U.S. bonds in the next two quarters. Bond prices are inversely related to yields, and rising yields mean that the net selling volume is greater than the buying volume.
In this regard, the U.S. financial website Zero Hedge further stated that if the implicit default risk of U.S. bonds and the U.S. twin deficits continue to rise, and as the Federal Reserve continues to remain hawkish, U.S. debt buyers at the global central bank level, including China and Japan, may subsequently sell off 900 billion in U.S. debt.
A corner of the U.S. money printing plant
For example, in order to avoid the yen plummeting again, Japan, as the largest creditor of the United States, may even clear its U.S. debt positions in exchange for liquidity to defend the Japanese government bond yield curve. This will become more clear in the context of the butterfly effect in which global central banks remove U.S. debt to replace gold in their international foreign reserves.
As the data below shows, in the past two decades, as the global central bank has changed from the largest buyer of US Treasury bonds to the largest net seller, as the global central bank's US debt holdings have declined, gold reserves have soared to record highs, and these countries have a high degree of similarity with countries that continue to sell US debt.
This shows that the volatility of U.S. Treasury bonds, which are the anchor of global asset prices, has become longer than that of gold, a traditional safe-haven asset. It is obvious that gold, as a key component of international reserves, is re-emerging as a financial currency.
According to the latest data released by World Gold Association on December 18, in the first 10 months of 2022, global central banks purchased nearly 704 tons of gold. Among them, a record 399 tons of gold were purchased in the third quarter, setting a record for the fastest gold purchase since the year when gold decoupled from the U.S. dollar, and defined gold as an important strategic asset in 2023. At this critical time, something unexpected happened to the market.
What happened is that China also broke its silence and sent out a new signal of increasing its gold reserves. As of the end of November, China's gold reserves increased by 32 tons to 1,980 tons. This is the first time that an increase in gold reserves has been disclosed since September 2019, which surprised the global market.
In addition, according to the latest data released by the World Gold Council citing customs, China's gold imports in October remained high, importing 146 tons, which also brought the cumulative gold imports from January to October 2022 to 1,048 tons, higher than the average level in the past three years. Data shows that China imported 821 tons, 217 tons and 986 tons of gold respectively in the first three years of 2021.
The fact that central banks around the world are accelerating the sale of U.S. debt in exchange for gold shows that it is only a matter of time before U.S. Treasury bonds lose their function as safe-haven assets, because U.S. debt, as the core carrier of the U.S. dollar, is built on a house of cards of huge debt, and most U.S. dollars are issued anchored at the expansion boundary of U.S. debt and are not supported by gold. This shows that the volatility of U.S. debt as a risk asset is lengthening.
As shown in the data chart, since 1971, the total debt of the United States has increased 53 times, while GDP has only increased 22 times. It is obvious that the current U.S. bonds are insolvent, and the real yield of U.S. Treasury bonds after adjustment for inflation is negative-yielding bonds. Only the overvalued U.S. dollar index is struggling to support it.
It is obvious that the current U.S. economy is under the toxic combination of "high debt, high inflation, high interest rates and low growth. The Federal Reserve's continued interest rate hikes will eventually bite back the U.S. Treasury market and cause bond interest payments to soar exponentially, weakening the ability to bail out its own debt, and triggering a crisis in the U.S. financial market. Investors are beginning to question whether U.S. Treasury bonds can continue to serve as a textbook risk-free investment in the global asset price market. The core benchmark attributes of l2.
press Wall Street financial giant Jim Rogers explained in an interview with the media on December 23 that for the United States, as the world's largest debtor country, the actual debt is much more than the U.S. Treasury Department admits. It may currently exceed 200 trillion, which is equivalent to seven times the official data. It is obvious that this is also a financial time bomb for the U.S. debt market. In the end, the U.S. debt economy will have to pay the price.
Against this background, the United States finally proposed that it would return to the gold standard . On December 22, U.S. Congressman Alex Mooney boldly submitted a proposal to the U.S. Treasury and the Federal Reserve for the fourth time in an attempt to return the U.S. dollar monetary system to the gold standard. Mooney's solution in the proposal was to control the Fed's money supply and return its decision-making power to the U.S. market. In other words, return to the gold standard.
Therefore, this explains the reason why the state of Kansas in the United States formally recognized gold and silver as legal tender in an updated proposal (HB2123) proposed on October 26, putting them on par with the US dollar.
Although, in theory, the return of the United States to the gold standard seems to be a long process (please refer to the chart below for the latest sounds), this move by Kansas effectively promotes the process to hedge the risk of U.S. dollar exposure, and continued inflation concerns are expected to support investment demand for gold.
In fact, the fact that central banks around the world are currently accelerating the sale of U.S. debt in exchange for gold and that the United States may return to the gold standard shows that it may only be a matter of time before U.S. Treasury bonds, known as the anchor of global asset prices, lose their function as a safe-haven asset. This also explains the reason behind the Bank of Japan’s unexpected Pearl Harbor attack on U.S. debt on December 20. (End)
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