PRC Sells $180B in US Treasuries; Nearly Nobody Notices

They have trillions worth of these IOUs out there nowadays.

About a decade ago, there was all this talk about a "balance of financial terror" coined by former US Treasury Secretary Lawrence Summers. According to this story, export-led Asian countries like China and Japan had no choice but to keep buying dollar-denominated assets since doing otherwise would result in the devaluation of their currencies and their loss of competitiveness. What's more, they couldn't readily "dump" US treasuries since doing so would only result in large losses on their existing holdings of $ assets.

Quoting Summers circa 2004 (when the world was young):

It is true and can be argued forcefully that the incentive for Japan or China to dump treasury bills at a rapid rate is not very strong, given the consequences that it would have for their own economies. That is a powerful argument, and it is a reason a prudent person would avoid immediate concern. But it surely cannot be prudent for us as a country to rely on a kind of balance of financial terror to hold back reserve sales that would threaten our stability.

Fast forward to 2015 and we find out that China has sold a hefty $180 billion in the space of a few months--much more than the holdings of all but a few countries--and the financial markets have hardly noticed. Indeed, bond yields have even deceased as of late as their prices have gone up (bond prices and yields move inversely):

To get a sense of how robust demand is for U.S. Treasuries, consider that China has reduced its holdings by about $180 billion and the market barely reacted.

Benchmark 10-year yields fell 0.6 percentage point even though the largest foreign holder of U.S. debt pared its stake between March 2014 and May of this year, based on the most recent data available from the Treasury Department. That’s not the doomsday scenario portrayed by those who said the size of the holdings -- which peaked at $1.65 trillion in 2014 -- would leave the U.S. vulnerable to China’s whims.

Instead, other sources of demand are filling the void. Regulations designed to prevent another financial crisis have caused banks and similar firms to stockpile highly rated assets. Also, mutual funds have been scooping up government debt, flush with cash from savers who are wary of stocks and want an alternative to bank deposits that pay almost nothing.

It all adds up to a market in fine fettle as the Federal Reserve moves closer to raising interest rates as soon as next month. “China may be stepping away, but there is such a deep and broad buyer base for Treasuries, particularly when you have times of uncertainty,” Brandon Swensen, the co-head of U.S. fixed-income at RBC Global Asset Management, which oversees $35 billion, said from Minneapolis.

I am not among those who believe China, and its Treasury holdings, don't matter. To you and me $180B is a colossal sum that boggles the mind. In the larger scheme of things, though, it's less than a seventh or so of the PRC's holdings. What would really cause turmoil is if not only the PRC but also major holders like Japan sold off simultaneously...and folks noticed. As believed so long ago, the trigger would be a massive loss in confidence in the US, most likely by piling on too much debt too rapidly.

Although many are sanguine that won't happen, another financial crisis on the same scale as the last one may just do the trick.