The People’s Bank of China has been unloading U.S. Treasuries recently. What does it mean for the U.S. economy and the gold market?
According to the Bloomberg, the PBOC has been quietly selling U.S. dollars over the last 12 months, which has brought its foreign-exchange reserves levels down by $315 billion. The sell-off accelerated after the devaluation of the yuan as China liquidated about $106 billions worth of reserves. Why? Well, the change of the currency regime triggered large and steady capital outflows from China, which forced the PBOC to start selling foreign reserves and buying yuan in order to prevent an excessive weakening of the currency. This could entail important consequences as China is the biggest holder of reserve assets in the world, holding $3.65 trillion of foreign reserves, under $1.3 trillion of them in U.S. government debt.
What are the implications of the slashing of Treasury holdings by China? Well, this sell-off could reduce the prices of Treasury bonds, which is equivalent to rising yields. The upward pressure on Treasury yields exerted by China is the reason why they have not declined materially in the face of the recent weakness in equities. According to City, if developing countries sell 10 percent of their U.S. Treasuries, which would be approximately $500 billion, 10-year Treasury yields would soar by 108 basis points. The upward pressure on Treasury yields could prompt the Fed to postpone the interest rate hike. Some analysts even say about the QE4 on the horizon if the selling continues. This could be a positive development for the price of gold (as the Fed would lose completely its credibility), although the upward pressure on the U.S. Treasuries negatively affects the gold market, since higher yields make the shiny metal less attractive in comparison to government bonds.
Summing up, China has been recently liquidating its foreign reserves, including U.S. Treasuries. The strengthening greenback and the end of the Chinese carry trade could mean that the PBOC would have to continue the sell-off, exerting upward pressure on Treasury yields. Higher yields would be negative for the price of gold, however, they could postpone the Fed interest rate hike and change the U.S. central bank’s stance to even more dovish.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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