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It was a surprise that the United States recently held a $61 billion auction of five-year Treasury bonds, but there were no bids. Although the auction size hit a new high in 2021, the winning bid rate was 4055%, 2 basis points higher than expected, becoming the most substandard product in a year and a half. At the same time, the bid multiples also hit a low point in a year and a half. Surprisingly, U.S. primary traders have instead become the last to take over, and their allocation ratio has hit a new high in a year and a half. The whole auction process is like playing on its own in the United States, which further illustrates the market's lack of interest in this issue of US bonds.
Although the scale of the U.S. bond auction hit a new high, the winning interest rate and bid multiples were disappointing. The higher-than-expected bid rate shows that the market is worried about the uncertainty of the US dollar rate cut expectations, and investors' confidence in US Treasuries has declined. At the same time, the decline in bid multiples also indicates that the market is not enthusiastic about investing in U.S. bonds, and investors are taking a wait-and-see attitude towards the medium-term economic outlook of the United States.
The recent strong US PMI data has weakened the market's expectations of a US interest rate cut, making investing in US bonds risky. U.S. dollar interest rate cuts usually lead to U.S. Treasuries***, but investors' interest in U.S. Treasuries has decreased due to the current uncertainty over the expectation of a U.S. dollar rate cut.
In stark contrast, China increased its holdings of U.S. bonds by 12.4 billion yuan in November, bringing China's current holdings of U.S. bonds to $782 billion, ending the seven-month streak of the trend. And not only China, but also Japan and the United Kingdom increased their holdings of US bonds in November. Does this mean that China will once again take on the role of a pick-up man?
The reasons for China's increase in U.S. debt can be attributed to two factors. First of all, the strengthening of the expectation of a rate cut in the US dollar and the US Treasury *** are one of the important reasons. China and other countries are increasing their holdings of U.S. Treasuries for higher interest rate returns and value preservation. Second, China's 14-month streak of increasing its holdings** also reflects China's long-term de-dollarization strategy, so it is in China's interest to increase its holdings of U.S. bonds.
However, it is expected that in December and January, as expectations of a rate cut by the US dollar weaken, China may ** US bonds again. Since China no longer relies on the US dollar to cut interest rates or raise interest rates to promote economic development, but to achieve stable economic growth by building high-end industries and promoting internal circulation, China's holdings of US bonds will be relatively reduced in the future.
China and the United States have different attitudes towards U.S. debt. China no longer relies entirely on the US dollar to cut interest rates to drive economic development, but promotes internal circulation through a variety of policies and builds high-end industries to drive economic growth. There is a clear difference in this with the United States.
China's internal circulation development model means that China is paying more attention to domestic consumption and market potential. By developing high-end industries and increasing consumption power, China is striving to achieve sustainable economic growth. This reduces dependence on external factors, reduces demand for U.S. debt, and reduces risk.
In contrast, the Fed needs to keep interest rates relatively high for longer due to poor Treasury auction data, increasing the risk for Treasury holders. It also exposes the extent to which the United States is dependent on external funding, in stark contrast to China's internal circulation development model.
The recent auction of $61 billion U.S. bonds was unbidden, and the allocation ratio hit a low point, indicating that the market is not interested in U.S. bonds. On the one hand, the uncertainty of the expectation of a US dollar interest rate cut has led investors to take a wait-and-see attitude towards US bonds. On the other hand, the extent to which the United States is dependent on external funding exposes risks. In contrast, China increased its holdings of U.S. debt by $12.4 billion in November, but this was largely passive, not a long-term increase.
For China, increasing its holdings of U.S. debt may be a necessary option in the short term. However, China is actively promoting the internal circulation development model and developing high-end industries domestically to achieve sustainable economic growth by enhancing domestic demand. By contrast, the United States' growing dependence on external funding may have increased the vulnerability of its economic and financial systems. In the long run, China will no longer rely on the US dollar to cut or raise interest rates to boost its economy, but will stabilize its development through internal circulation and improving its own strength. This may have a certain guiding effect on China's attitude towards holding U.S. bonds in the future.
In the new year, the economic and financial developments of China and the United States will continue to attract attention. For China, it is necessary to further strengthen the development of internal circulation, improve economic autonomy, and reduce dependence on external factors. For the United States, it is necessary to strengthen the resilience and internal and external balance of the economy, reduce dependence on external funds, and reduce systemic risks. The cooperation and competition between the two sides will have a significant impact on the global economic landscape.
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