At 4 p.m. local time on December 19, the U.S. Treasury Department released the latest data on the balance of U.S. bonds held by various countries. It should be noted that there is a certain delay in the U.S. Treasury data, and the data as of the end of the last two months will be released around the 20th of each month, so the deadline for the data released this time is October 31, 2023, and the holding data at the end of November will not be released until January 19 next year.
As a rule, let's take a look at the Chinese position data that we are most concerned about. As of the end of October this year, Chinese mainland held $769.6 billion in US bonds, down $8.5 billion from $778.1 billion at the end of September, marking the seventh consecutive month since April this year that China has reduced its holdings of US bonds.
In October, Japan, the largest overseas creditor of the United States, held $1,098.2 billion in U.S. bonds, an increase of $11.8 billion from September, while the United Kingdom, the third largest overseas creditor, increased its holdings by $24.1 billion to $693 billion. The total amount of U.S. debt held by institutions and individuals in all countries in the world (except the United States) was $7,565 billion, which decreased for two consecutive months after 10 years.
Everyone should know that the balance of U.S. bonds has exceeded 33 trillion U.S. dollars, and less than a quarter is held by foreigners, so in fact, most of the U.S. bonds are bought by U.S. institutions and individuals, among which the U.S. central bank Fed holds the largest amount of debt, even in a state of continuous balance sheet reduction, it still exceeds 7 trillion U.S. dollars.
Back to the issue of our holdings of U.S. bonds.
In September, China's balance of U.S. bonds fell below the $800 billion mark, and in October, it "made persistent efforts" to reduce its holdings by $8.5 billion, leaving only $769.6 billion.
I don't want to go against my original intention to talk nonsense in order to provide emotional value, objectively speaking, the probability of China increasing its holdings of U.S. bonds in November is very high, why do you say that? Please don't rush to scold me, and see the results of my data analysis before judging whether I am talking nonsense.
Let's take a look at the following chart, which is the U.S. Treasury Department's data on U.S. debt balances based on maturity.
In October 2023, China's total holdings of U.S. bonds were US$769.6 billion, including US$764.6 billion in long-term U.S. bonds and US$5.06 billion in short-term U.S. bonds, and US$778.1 billion in September 2023, US$773.2 billion in long-term U.S. bonds and US$4.9 billion in short-term U.S. bonds.
In other words, in October, we reduced our holdings of long-term Treasuries by $8.6 billion and increased our holdings of short-term Treasuries by $160 million, which together add up to the aforementioned $8.5 billion (with a slight difference after consolidation). Please remember that the data on the reduction of long-term U.S. bonds is the key to understanding what follows.
A separate table released by the U.S. Treasury Department disclosed the monthly increase or decrease in long-term U.S. debt, and the change in the amount of Chinese mainland's long-term U.S. debt in October increased by $1.85 billion, which is completely different from the previous decrease of $8.6 billion.
What is going on? Could it be that the US Treasury Department falsified the data? If this is the case, the staff of the department can be laid off, and the falsification does not know how to match the data, and the level is too poor.
If you look at the data from previous months and other countries, you can see that there has never been a correlation. Obviously it is not a problem of data falsification, and the US Treasury will not make such low-level mistakes in a row.
In fact, it is normal for the amount of long-term U.S. bonds to decrease against each other, and the reason for this is that the changes in the balance of long-term U.S. bonds held by countries (regions), including China, are composed of two parts: one is active buying or selling, and the other is passively increasing or diluting.
The monthly change data on long-term U.S. bonds disclosed in the table below is an active buy or sell, that is, Chinese mainland voluntarily increased its holdings of U.S. bonds by $1.85 billion in October.
The chart above shows the change in long-term Treasury bonds, which includes the sum of active buying and selling and passive dilution, for a total decrease of $8.6 billion. What is passive dilution? Let me give you an example.
Suppose Zhang San bought 1,000 shares of Company A at 15 yuan/share on September 30, with a market value of 15,000 yuan, and the stock price fell in October, and the stock price of Company A on October 31 was 10 yuan/share, Zhang San did not sell a share of Company A's stock, but the market value was only 10,000 yuan, and the shrinkage of 5,000 yuan was not caused by Zhang San's selling, which was passive dilution.
The passive dilution of long-term Treasury bonds is the same thing, which has "evaporated" due to the decline in the price of US Treasury bonds.
Let's take a look at the changes in the yield of the 10-year U.S. Treasury bond, the main product in long-term U.S. bonds, which rose by 7.58% in October, which is not a small increase. Note that the price of bonds is inversely proportional to yields, and rising yields mean falling prices, so the price of 10-year Treasury bonds fell quite a bit in October, resulting in the passive dilution of long-term Treasury bonds held by countries (including domestic institutions), and the market value of US bonds will decrease even if they do not sell any US bonds.
We reduced our long-term U.S. bonds by $8.6 billion in October, and in practice, not only did we not actively sell them, but we bought some, but the total market value shrank due to passive dilution.
The yield on the 10-year Treasury note began to fall in November, falling 12.28% in a month, higher than the absolute value of the rise in October, which means that the price of US bonds has rebounded sharply, and the market value of long-term US bonds held by various countries has "ballooned".
As a result, China's total holdings of U.S. bonds in November are likely to increase, which is what we often call an increase in holdings.
This form of overweight is mainly due to passive increase, which is similar to passive dilution, and is also not the result of our active large purchases. Of course, it cannot be ruled out that China's aggressive sell-off of U.S. bonds in November will cover the passive increase in active reductions, and the balance of U.S. bonds held will decrease. However, this is unlikely to happen, for the simple reason that "chasing the rise and killing the fall" can be applied in any field.
In the past few months, everyone has reduced their holdings of U.S. bonds because the price of this thing has been falling, and I don't know when it will be the head, just like the stock price will fall every day, and investors will "kill it". Treasury prices began to rebound in November, and the Fed will no longer raise interest rates, but may cut interest rates in the first half of next year, making it possible for Treasury prices to continue to rise, in fact, it has indeed risen a lot since December.
In October, we have started to gradually buy long-term US bonds, and it is more in line with the current logic to buy more bonds in November. To make extreme assumptions, even if we do not buy U.S. bonds in November or even reduce our holdings slightly, the total market value of our holdings will increase passively, and it is almost impossible for the balance of bonds to fall below $760 billion.
Some of my friends didn't want to believe my conclusions. It doesn't matter, the answer will be revealed in a month, and we'll verify it then.