The two biggest foreign investors in U.S. Treasuries have been aggressively selling bonds since June. Those two countries are China and Japan, and their actions are a sign of the growing risk of owning long-term bonds.
In the month of June, these two countries accounted for nearly $40.8 billion in sales of U.S. Treasuries. Now June is the most recent month of data available – and it’s likely that the exodus has continued in July and August.
After years of buying more U.S. Treasuries at every auction, China and Japan have actually started selling their stakes. These countries have been selling U.S. Treasuries for three months now, and their sales are accelerating.
Now, China and Japan can’t just dump all their Treasuries overnight. After all, China owns $1.3 trillion of Treasuries and Japan holds $1.1 trillion. Massive selling overnight could cause panic in the bond market, and disrupt foreign and trade relations.
Important to note is that the June sales of U.S. Treasuries marked the biggest outflow since 1977 when the government began collecting data. And it’s no coincidence that the massive selling happened immediately after Ben Bernanke announced plans to “taper” bond purchases. The end of QE3 is underway, and foreign investors don’t want to stick around.
A senior economist at the Chinese Academy of Social Sciences – a top China think-tank – had this to say. “China’s net selling of U.S. treasury could be a reaction to the possible QE exit. Holding too much U.S. debt is not wise at a time when Treasury yields rise and prices fall.”
In a couple weeks, data for July will be available. When it comes out, I expect we’ll see that June was just the start of a massive sell-off in U.S. Treasuries.
The selling to date has been primarily long-term bonds. That’s because bonds with lengthy durations have the most to lose when interest rates rise.
While China and Japan can’t dump all their long-term U.S. Treasuries overnight without tilting their hands investors like you and I don’t have the same problem. We can and should be following the lead of China and Japan: now is the time to sell Treasuries.
The tides are clearly starting to turn. Even the Pimco’s Bill Gross – The King of Bonds – says “The secular 30-year bull market in bonds likely ended on April 29, 2013.”
After all, two of our country’s biggest trading partners and bond investors have stopped buying our bonds. Not only that, but they’re now selling their existing holdings into the market. If China and Japan don’t want to buy our bonds, who will?
Whether you own bonds today or have already sold your holdings, you should be concerned.
Related Tickers: iShares Barclays 20+ Year Treasury Bond ETF (NYSEARCA:TLT), ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT).
This article is brought to you courtesy of Ian Wyatt from Wyatt Investment Research.