61 billion U.S. bonds are unwanted, China continues to increase its holdings, who is the receiver?
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Preface. The recent auction of $61 billion in five-year U.S. bonds was a big surprise. While the auction size hit a new high since 2021, the winning bid rate beat expectations by 2 basis points and was the highest final spread in a year and a half. Bid multiples have also reached their lowest point in a year and a half. At the same time, the major US brokers were the last to accept **, receiving the highest percentage in a year and a half. This indicates that the market interest in the issuance of US Treasury bonds is quite low. There are two reasons for this: first, the recent strong US PMI data has weakened the expectation of interest rate cuts, resulting in certain risks in investing in US bonds; Second, people's medium-term economic expectations for the United States are uncertain, especially the lack of clear signals of interest rate cuts and interest rate hikes, resulting in an uncertain economic outlook. However, China increased its holdings of U.S. bonds by $12.4bn in November, bringing U.S. bonds to $782 billion after seven consecutive months**. In particular, foreign debtors such as Japan, China and the United Kingdom increased their holdings of US Treasuries in November. While this is partly related to increased expectations of interest rate cuts and US bonds***, China's inflows have been largely passive. Based on China's 14-month streak of overweight**, the long-term trend of de-escalation will not change. As rate cut expectations wane, China is expected to continue to ** US Treasuries in December and January. However, unlike 20 years ago, China no longer relies on interest rate cuts or appreciation to boost its economy. In 2024, whether interest rates are raised or lowered, China will unswervingly promote the development of cutting-edge industries through a series of policies, promote domestic circulation, and achieve stable economic growth. In contrast, U.S. bond issuance data is weak, and there is a growing risk that the Fed will keep interest rates high for a long time.
The $61 billion Treasury auction was lower than expected.
The recent auction of $61 billion of five-year bonds in the United States was a big surprise. While the auction size hit a new high since 2021, the winning bid rate exceeded expectations, reaching the highest penny spread in a year and a half. At the same time, bid multiples reached their lowest point in a year and a half. This seems to indicate that investor interest in the Treasury issuance is quite low.
Most surprisingly, however, it is the Tier 1 dealers in the U.S. themselves who are the final beneficiaries. In the space of a year and a half, their distribution ratio has reached an all-time high. The issuance of US bonds looks like the US is entertaining itself, underscoring the market's indifference to this issue. What is the reason behind this?
Extension: Analyze the reasons for the cold market.
First, uncertainty over expectations of lower interest rates has dampened investor interest in U.S. bonds. Falling interest rates typically lead to higher investment returns in U.S. bonds***. However, the recent strong performance of US Purchasing Managers' Index (PMI) data has made expectations of interest rate cuts uncertain. This means that there is a certain amount of risk involved in investing in U.S. bonds, which makes investors shy away from U.S. bonds.
Second, market uncertainty about the medium-term outlook for the U.S. economy has also affected investors' interest in U.S. Treasuries. Especially in the absence of obvious signs of interest rate cuts and rate hikes, the market is more cautious about the economic direction of the United States in the coming period. Investors are more inclined to wait and see rather than blindly participate in U.S. Treasury investments.
China's growing share of U.S. debt is a cause for concern.
Despite declining global investor interest in Treasuries, China added $12.4 billion to its holdings of Treasuries in November, bringing its share of Treasuries to $782 billion, ending a seven-month streak of **. This raises concerns and the question arises as to why China has decided to continue to increase its holdings of US debt.
Expand: Analyze the reasons why China continues to increase its share of U.S. debt.
First, China's increase in holdings can be understood as a reactive reaction. With the expectation of interest rate cuts on U.S. bonds, holding U.S. bonds can earn higher yields. As the world's second-largest economy, China has large foreign exchange reserves and needs to invest carefully to achieve a higher rate of return. Therefore, China's choice to increase its holdings of U.S. bonds to maintain and increase its value is based on market expectations and the consideration of maximizing benefits.
Second, the long-term trend of de-industrialization continues. China's 14th consecutive month of increased holdings** indicates that China is gradually reducing its dependence on foreign exchange reserves and diversifying its foreign exchange reserves. Although China is currently increasing its holdings of U.S. bonds, this does not change China's long-term strategy of de-capitalization.
However, as expectations of interest rate cuts wane, China is expected to continue to ** US Treasuries in December and January. This further proves that China's increase in US debt holdings is a short-term option, not a long-term strategy.
China does not rely on interest rate cuts to boost its economy.
Compared to 20 years ago, China no longer relies on interest rate cuts or hikes to boost its economy. In 2024, whether interest rates are raised or lowered, China will adopt a series of policies to focus on promoting the sustainable development of cutting-edge industries, promoting internal circulation, and achieving stable economic growth.
Expanded: An Analysis of China's Independent Economic Development Prospects.
First, China is striving to build cutting-edge industries. By increasing investment in R&D, China will improve its ability to innovate in science and technology, improve its ability to innovate independently, promote and develop high-tech industries, and strengthen the protection of intellectual property rights, so as to improve the quality and efficiency of the economy and reduce its dependence on external economic fluctuations.
The second is to expand domestic demand. By strengthening the construction of an economic system dominated by domestic demand, improving the consumption capacity of urban and rural residents, increasing infrastructure construction, and creating more employment opportunities, the internal self-circulation of China's economy will be realized, and the sensitivity to external economic fluctuations will be reduced.
In conclusion, compared to 20 years ago, China no longer waits for interest rate cuts or interest rate hikes to boost its economy. Regardless of whether interest rates are raised or lowered, China will stabilize economic growth through a series of policies such as promoting the development of cutting-edge industries and strengthening domestic circulation. On the other hand, weak U.S. bond issuance data makes it more likely that the Fed will keep interest rates higher for longer.
Conclusion. The recent $61 billion U.S. bond auction didn't go as smoothly as expected, with higher-than-expected interest rates and record low bid-ask multiples. However, China increased its participation in U.S. debt by 12.4 billion in November, bringing its share to 782 billion. While this increase is partly related to increased expectations of interest rate cuts and US Treasuries***, it is more passive. Compared with 20 years ago, China no longer relies on interest rate cuts to boost its economy, but has achieved stable economic growth through a series of policies such as building cutting-edge industries and strengthening domestic circulation. On the other hand, the risk is increasing as the US bond issuance data is weak and the Federal Reserve maintains high interest rates.
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