Economist’s “News and Views” Tuesday 9-10-2024
Japan Sell off more than $60 Billion Treasury Holding: What's Going On?
Fastepo: 9-10-2024
Foreign countries hold U.S. Treasury securities as a central component of their financial strategies, but the risks associated with these holdings can be substantial and have far-reaching consequences. One of the primary risks is interest rate fluctuations.
When U.S. interest rates rise, the value of existing Treasury securities declines. For countries that hold large amounts of Treasuries, this can lead to significant losses, especially in periods of unexpected rate hikes, such as those seen during inflationary pressures.
Another critical risk is currency fluctuation. U.S. Treasuries are denominated in U.S. dollars, meaning that foreign holders are exposed to currency risk.
If the U.S. dollar weakens relative to their own currency, the value of these investments diminishes when converted back.
This can be particularly damaging for countries with currencies that are either volatile or strengthening. In recent years, this risk has become more prominent as global exchange rates have fluctuated due to shifting economic conditions.
Inflation also poses a threat to the value of U.S. Treasuries. If inflation in the U.S. exceeds the yield on these securities, the real value of returns for foreign holders erodes. Given recent inflationary trends, especially in the wake of global economic disruptions, this risk has become a pressing concern.
For countries relying on these investments to preserve the value of their foreign exchange reserves, inflation can drastically undercut the purchasing power of their returns. Political and geopolitical risks further complicate the picture. Domestic U.S. political debates, such as those surrounding the federal debt ceiling, can create uncertainty over the government’s ability to meet its debt obligations.
Even the threat of a technical default due to political brinkmanship can destabilize global confidence in U.S. Treasuries, leading to market turmoil.
Moreover, geopolitical tensions between the U.S. and other countries could result in sanctions or restricted access to U.S. financial markets, making Treasuries a less reliable asset for some foreign governments. Liquidity risk also plays a role, especially in times of global financial instability.
Although U.S. Treasuries are generally considered liquid, in periods of market stress, large holders may find it difficult to sell them quickly without impacting their price. This could be particularly problematic for countries that need to convert their holdings into cash during a crisis, as a sudden sell-off could depress the market value of their investments.
Additionally, countries with large holdings of U.S. Treasuries, like China and Japan, face concentration risk. Relying heavily on a single asset class exposes these countries to outsized losses if the U.S. financial system experiences significant stress or if the dollar weakens substantially.
The sheer size of their holdings makes it difficult for these countries to exit their positions without influencing the market negatively, further amplifying their risk.
As of September 2024, Japan remains the largest foreign holder of U.S. Treasury securities, though its holdings have seen significant fluctuations throughout the year. In March 2024, Japan's holdings stood at approximately $1.87 trillion.
However, by May 2024, Japan's holdings dropped to around $1.128 trillion after a series of sales amounting to $59.5 billion, including a $22 billion sell-off in May following a $37.5 billion reduction in April.
What to Expect Next: The Longest Yield Curve Inversion Explained
Taylor Kenny: 9-10-2024
Did you know that a dis-inversion historically means that a recession is imminent? Taylor shares the yield curve dating all the way back 1975. Will we be able to escape a recession?
CHAPTERS:
00:00 - What is the Yield Curve?
01:44 - Bond Prices vs. Yields
02:52 - Impact of FED Interest Rates on Banks
04:33 - Historical Recession Indicators
05:56 - Current Economic Outlook
07:40 - Preparing for What’s Ahead
BRICS+ FUTURE: Gold Backed Currency, Summit in Russia, Expansion, ASEAN Ties| Yaroslav Lissovolik
Lena Petrova: 9-10-2024
The BRICS Summit will take place in late October in Kazan, Russia: Will the bloc announce an alternative financial payment platform? Will it admit new members, possibly extending an invitation to a NATO member, Turkey?
How will the BRICS+ nation states align their policies to form a united front, something they desperately need, to move forward in a cohesive manner towards a new multipolar world?
Will ASEAN lean towards BRICS? I had the pleasure of discussing these and other very important questions with Dr. Yaroslav Lissovolik, the leading expert on the BRICS+ economic alliance and the founder of BRICS+ Analytics.
During our conversation, Yaroslav and I discussed the challenges that the bloc is facing and the direction it needs to take in order to enjoy successful growth. We spoke about de-dollarization, South-South cooperation and a road to multipolarity.