What if Japan or China intervened in the foreign exchange market to sell dollars and support their currencies and liquidated U.S. Treasuries in the process - and the sky didn’t fall down?
Their combined $2 trillion pile in June, the last month official U.S. Treasury data is available, equated to 7.8% of the $25 trillion outstanding marketable U.S. Treasuries, less than a third of the record 25.4% registered in June 2007. But they don’t bestride the Treasuries market like they once did, nor does the threat of them selling strike the same fear into bond investors, global markets at large, and even policymakers in Washington.
China’s Treasuries holdings fell a valuation-adjusted $34 billion in the first half of the year, although its U.S. agency debt holdings rose nearly $20 billion. Japan’s Treasuries stash increased by $40 billion while its agencies pile fell by $25 billion. That’s a lot, but nowhere near keeping pace with the increase in supply. The Fed continues to reduce its holdings by $60 billion a month, and U.S. Treasury issuance is exploding.