James Bullard, President of the Federal Reserve Bank of St. Louis, reiterated on May 23rd, "The more we raise interest rates in the early part of the cycle, the better we will be able to control inflation and inflation expectations." The Federal Reserve should accelerate the pace of raising interest rates to 3.5% by the end of 2022, which, if successful, would create room for rate cuts in 2023. This also indicates that the Federal Reserve is committed to continuing its aggressive tightening of monetary policy. Meanwhile, the market is increasingly concerned about the growing signs of a slowdown in the U.S. economy, leading to a decline in U.S. Treasury yields for the third consecutive trading day. The benchmark 10-year U.S. Treasury yield has started to retreat after touching the 3.1% level on May 8th, reaching a three-week low of 2.7811%. The 30-year U.S. Treasury yield also fell by 7.3 basis points, reporting at 2.994%. The two-year U.S. Treasury yield dropped by 3.3 basis points, reporting at 2.578%.
Goldman Sachs reported on May 20th that the attractiveness of U.S. Treasuries relative to alternatives is diminishing, and global official institutions' efforts to de-dollarize should lead to a sharp decline in foreign demand for U.S. Treasuries, including from countries such as China and Japan, in the coming quarters. This has also led Barclays to announce on May 18th that it would exit its long position on U.S. Treasuries with substantial losses. What is more concerning for the market is that the largest buyer of U.S. Treasuries, the Federal Reserve, will also begin to sell U.S. Treasury assets at a scale of $65 billion to $95 billion per month starting in June (quantitative tightening), which will further suppress long-term U.S. Treasuries. New data is reflecting this change.
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According to the report on international capital flows released by the U.S. Department of the Treasury on May 17th (which traditionally has a two-month delay in reporting data), in March, global official institutions net sold $32.4 billion in U.S. Treasuries, more than double the February sales of $16.2 billion, and the largest monthly sale in two years. At the same time, foreign private investors also sold $94.3 billion in U.S. securities assets, almost 3.7 times the February sales of $25.4 billion.
U.S. journalist reports indicate that in March, 19 countries, including China, Japan, Luxembourg, Switzerland, Saudi Arabia, Australia, the Philippines, Vietnam, Israel, the Netherlands, Brazil, Singapore, Kuwait, the United Arab Emirates, Italy, Norway, South Korea, Sweden, and Poland, all sold varying amounts of U.S. Treasuries. For example, Saudi Arabia, a traditional ally of the U.S. economy, sold U.S. Treasuries for the second consecutive month, and Israel also reduced its holdings by $6.5 billion in U.S. Treasuries.
Among them, China reduced its holdings of U.S. Treasuries by $15.2 billion in March, marking the fourth consecutive month of reduction, with its position dropping to the lowest since 2010 at $1.039 trillion. In the previous three months, it had reduced its holdings by $5.3 billion, $8.6 billion, and $12.2 billion, respectively. Looking at a longer time frame, over the past 12 months, China has net sold $60.8 billion in U.S. Treasuries.
It is worth noting that with the Japanese yen falling to a 20-year low against the U.S. dollar, the pace of the yen's depreciation is very fast and shows no signs of ending, having fallen by 12% against the dollar in just three months. However, the sharp depreciation of the yen may be having an unexpected consequence: the collapse of U.S. Treasuries. Due to the yen's extreme sensitivity to the U.S.-Japan interest rate differential, the Federal Reserve's aggressive rate hikes have already impacted the yen, resulting in a plummeting demand for U.S. Treasuries in Japan, contributing to a historic collapse of U.S. Treasuries.
Data shows that Japan significantly reduced its holdings of U.S. Treasuries by $73.9 billion in March, the largest among all foreign holders of U.S. Treasuries, and this trend continues. According to the latest estimates from BMO Capital Markets, Japan, the largest foreign holder of U.S. Treasuries, has liquidated over $60 billion in U.S. Treasuries in the past three months.
It should be noted that due to the U.S. Department of the Treasury's traditional two-month delay in reporting official U.S. Treasury holdings (currently only up to March, with April and May's official U.S. Treasury holdings to be reported with a two-month delay), global central banks are expected to sell more as the 10-year U.S. Treasury yield has risen from 2.4% at the beginning of April to the current 2.9%. Data shows that as of May 20th, the 10-year U.S. Treasury yield has surged by 98.6 basis points since April.Additionally, the persistently high inflation expectations have led to concerns that the Federal Reserve may shift towards a more hawkish stance, which could further exert selling pressure on U.S. Treasuries. Coupled with the current decline in the status of the U.S. dollar and the negative real yield on U.S. Treasuries, the appeal of U.S. debt has diminished. For instance, the Federal Reserve is set to start reducing its balance sheet from June (ultimately withdrawing trillions of dollars in U.S. debt over a year) and will no longer be buying U.S. debt. This could lead to a shift in demand for U.S. debt from institutional investors who initially chose to arbitrage.
The real yield on the 10-year U.S. Treasury note turned positive for the first time in two years since April 21st, but immediately reversed course and headed downward. A negative real yield implies that investors will incur an annual loss when purchasing 10-year U.S. Treasury notes.
In fact, the latest data provided to us by the International Monetary Fund (IMF) and the World Gold Council also validates the aforementioned logic. In recent years, global official funds have been continuously reducing their holdings of U.S. debt, replacing it with non-U.S. assets such as gold to hedge exposure risks. Gold continues to act as a trust anchor in international reserve assets. As shown in the chart below, as U.S. Treasury holdings decline, global central banks' gold reserves have soared to a historical high.
Subsequently, on May 20th, the U.S. Quartz website reported that with the rise in interbank lending rates and inflation at a 40-year high, some of the returns on U.S. debt have been hedged, which could lead to cornerstone-level large institutional investors in U.S. debt continuing to sell in the coming period. The American media believes that against the backdrop of the upward trend in U.S. Treasury yields, if the uncertainty of U.S. inflation risks increases, there is a possibility of clearing U.S. debt.
According to our statistics based on the reports published by the U.S. Department of the Treasury, as of March, global central banks have significantly net-sold U.S. debt amounting to $1.14 trillion over 28 out of the past 40 months, reflecting this view, and this trend continues.
Subsequently, Wall Street veteran Jim Rickards further explained that the development of digital currencies or digital gold wallets supported by local currencies, gold, and strategic resources such as oil is expected to weaken the dominant position of the U.S. dollar and may end sooner than most people expect. To hedge U.S. debt exposure risks, it is clear that gold is no longer a top-tier peripheral asset but is regaining its financial and monetary attributes.
For example, a month ago, the Dutch central bank, which offers negative interest rate mortgages, implied in a report on its website that if the U.S. dollar system collapses, gold could once again serve as the foundation for establishing a monetary system, which is quite shocking to the market. It is against these backgrounds that unexpected things have happened again.
According to a follow-up report published by ZeroHedge on May 21st, the U.S. Treasury Department may ban private ownership of physical gold and confiscate it (there is a precedent in U.S. economic history, for specific details, please refer to the chart below). This also means that Americans do not have private property rights to gold, as the Federal Reserve has essentially lost control over inflation and is currently monetizing trillions of dollars in debt deficits. The current U.S. gold and silver coin market is reflecting this analysis.
According to the latest data released by the U.S. Mint on May 23rd, as of May 22nd, the sales of U.S. silver coins continue to be strong, with another 480,000 sold that week, bringing the total sales to 3.53 million since November 2021.
In addition, the U.S. Mint sold another 21,200 ounces of Gold Eagle coins in the past week, bringing the total sales to 1.371 million ounces over the past 12 months, while the total for the entire years of 2020 and 2019 was only 1.2 million and 152,000 ounces, respectively.The financial research team has also emphasized on multiple occasions that gold is expected to once again take on the role of anchoring currencies, digital currencies, or Special Drawing Rights (SDRs), serving as the foundation for establishing another global financial monetary system parallel to the US dollar. This marks the beginning of a new era.