China likely to sell $40 billion in bonds per month through year end
The story that's being passed around today is China cutting its holdings of US Treasuries. That's nothing new as we already know that foreign exchange reserves were down $315 billion in the past year.
We don't know the exact size of continued selling but it's likely to have ramped up since turmoil hit Chinese markets. Bloomberg reports:
China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter.
Channels for such transactions include China selling directly, as well as through agents in Belgium and Switzerland, said one of the people, who declined to be identified as the information isn't public. China has communicated with U.S. authorities about the sales, said another person. They didn't reveal the size of the disposals.
Then-year Treasury yields fell to 1.90% from 2.20% in the recent round of volatility but that has now completely retraced. Bill Gross speculated that China sold the long end into the rally.
The actual volumes of selling now matter less than the playbook. China will inevitably run into further problems as it pushes unsustainable growth targets. We know now that as they press that policy, it will mean bond sales.
Calling the end of the bond market rally has been a death sentence. It's been one of the most popular trades for 3 years and it's blown up time and time again. In the first month of 2014, yields rose above 3% and everyone was short. A year later and yields were at a crushing 1.65%.
This time, however, a 10% rout in stocks didn't cause the kind of sustained plunge in yields you might expect. With China selling the time has come to finally ditch US bonds.
