Highlights of the week of December 12, 2016

Dear PGM Capital Blog readers,

In this weekend’s blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of October 3, 2016:

  • USA FED Increased interest rates with 0.25%.
  • Foreign Central Banks, dumped a record in USA papers.

USA FED INCREASED RATES WITH 0.25%:
On Wednesday, December 14, the U.S. Federal Reserve raised interest rates and signaled a faster pace of increases in 2017 as central bankers adapted to the incoming Trump administration’s promises of tax cuts, spending and deregulation.

The increase in the federal funds rate to a range between 0.50 percent and 0.75 percent was widely expected. But the prospect of a brisker monetary tightening contributed to a selloff in shorter-dated U.S. Treasuries and stocks.

In a news conference following the unanimous rate decision, Fed Chair Janet Yellen said Donald Trump’s election had put the central bank under a “cloud of uncertainty” and already prompted some policymakers to shift their view of what’s to come.

The rate increase was the first since last December and only the second since the crisis, when the Fed cut rates to near zero and deployed other tools such as massive bond purchases to stabilize the economy.

FOREIGN CENTRAL BANKS DUMPED A RECORD IN USA PAPERS:
When looking at the Fed’s update of Treasuries held in custody, we noted something troubling: the number had dropped sharply. Among the biggest sellers – on a market-price basis – not surprisingly was China. But It wasn’t just China: Saudi Arabia and Belgium also continued to sell their USA Treasury holdings as can be seen from below table.

In the latest monthly update for the month of October, we find that what until a month ago was “merely” a record US$375 billion in offshore central bank sales in the period ending September 30, one month later, risen to a new all time high US$403 billion in Treasuries sold in the past 12 months.

As the chart below shows, there has never been such an aggressive selling of US Treasuries over a 12 month period in history.

PGM CAPITAL ANALYSIS AND COMMENTS:

FED Increased rates:
As can be seen from below chart, U.S. bond yields had already begun moving higher following Trump’s victory and as expectations of the Fed rate increase solidified.

In the weeks following the election, Fed policymakers have said Trump’s proposals could push the economy into a higher gear in the short run. Even though the details of the Republican businessman’s plans remain uncertain, Wednesday marked a rare case in which the Fed moved its interest rate outlook higher in the era after the 2007-2009 financial crisis.

Foreign Central Banks dumping US Papers:
China, which in October “sold” a record US$41 billion in US paper, and a massive US$125 billion in the last 4 months, bringing its total Treasury holdings to just US$1.116 trillion, the lowest amount of US paper held by Beijing since 2010 as can be seen from below chart.

What has become increasingly obvious is that; foreign central banks, sovereign wealth funds, reserve managers, and virtually every other official institution in possession of US paper, is liquidating their holdings at a disturbing pace, something which in light of the recent surge in yields to over 2 year highs, appears to have been a prudent move.

While it is unclear under what conditions foreign buyers may come back, one thing is clear: as of this moment the selling strike not only continues but is accelerating, and should the foreign liquidation of Treasuries fail to slow, Yellen will soon have to plan how not only to abort the current rate experiment which continues to pressure yields higher around the globe, but to start thinking how to launch QE4 instead.

Until Next Time

Yours sincerely,

Suriname Times foto

Eric Panneflek

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