On April 23, the U.S. stock market posted its longest losing streak in more than a year, exacerbating the recent financial market woes in the U.S. related to the escalation of the Iran-Israel conflict and sticky inflation, suggesting that investors are more aware of geopolitical risks than ever before in the decision-making process.
The U.S. Treasury sell-off has resurged, with the price of the benchmark 10-year Treasury bond continuing to fall from last week's decline, with yields closing at 4.60% to a six-month high, as investors sell off sharply.
Immediately afterward, Barclays Bank said in a report on April 22 that investors should consider selling 10-year Treasury bonds and establish themselves not to rush into buying US Treasury bonds as expectations of the Federal Reserve's interest rate cuts this year dissipate. The market has pushed back its expectations for the first interest rate cut of the year to September, which will exacerbate the soaring US debt deficit and interest costs. Because the soaring debt deficit of the world's largest economy is making the recent rally in US debt appear excessive.
At the same time, an emergency lending facility launched by the Federal Reserve last year to rescue the banking crisis was officially stopped on April 11, making the U.S. banking industry and bonds face a liquidity test again, and the uncertainty of the Fed's termination of balance sheet reduction has once again exacerbated the liquidity crunch of U.S. Treasury bonds, which may further counter more U.S. regional banks.
Then, according to data cited by the US financial website ZeroHedge on April 22, the fund assets of the US banking market appeared "Lehman Brothers" Not only that, but the US banking sector also saw another massive deposit withdrawal last week, which also led to a staggering $330 billion drop in total US deposits and fund assets since March this year (see the chart below for details), indicating that the sell-off in US regional banks and Treasury markets will further accelerate, and the new US Treasury bonds issued by the US Treasury will also have high interest costs。
Because, in March last year, the direct cause of the collapse of three regional banks in the United States was triggered by high interest rates that caused the huge losses in the US bond portfolios of these banks, which exposed the vulnerability of the US banking industry in front of high interest rate costs, and increased the likelihood of widespread credit events, directly igniting the storm that more banks in the United States may fail, which will become clearer under the Fed's reiteration of the expectation of later and fewer interest rate cuts, which suggests that the collapse of New York Community Bank in March this year may not be an isolated case, and may continue to contag other banks like the collapse of Silicon Valley Bank last year。
The logic behind this is that once there is a crisis in important sectors such as regional banks, the U.S. bond market and U.S. commercial real estate, the Fed will have to enter a state of bailout, especially the U.S. Treasury market, which is now in the midst of a storm of questionable credibility, and the toxic cocktail combination of "high debt, high interest rates and low growth" will backfire on the debt burden of the U.S. Treasury, which may force the Fed to declare victory over inflation in advance and begin to capitulate.
The U.S. Treasury Department's semi-annual fiscal report released on April 20 (from October 1, 2023 to March this year) shows that the federal budget deficit has reached $1.1 trillion, and the U.S. national debt is currently hovering around $35 trillion, an increase of $2 trillion last year alone, and nearly $20 trillion in the past decade, and more importantly, the U.S. Congressional Budget Office predicts that the U.S. national debt will increase by another $20 trillion over the next decade.
But to make matters worse, last year, the U.S. Treasury had to raise nearly $20 trillion to pay off the debt due, in addition to borrowing an additional $2.4 trillion in new debt on top of the $20 trillion. So far, in the first three months of 2024 alone, the U.S. Treasury has issued a record $7.2 trillion in government bonds, breaking the record for quarterly debt issuance set during the pandemic in 2020.
Of the $7.2 trillion in debt issuance last quarter, about $600 billion was brand new...... This means borrowing up to $6.6 trillion to refinance existing debt. It also means that the annual interest expense of the U.S. federal government will continue to soar, as interest rates are now much higher than in the past.
According to the White House's projections and the latest data from the Congressional Budget Office, the United States will fall into an inevitable fiscal cliff in 2031, and the Social Security Trustee's 2024 annual report also shows that the plan will run out of money in 2033, and solving this problem will require trillions of dollars in bailouts.
To get out of the federal fiscal cliff and the drying up of Social Security funds, the Fed will have to resort to more quantitative easing to print trillions of dollars, which will send inflation soaring to double digits now, well above the levels of 2022 and 2023, and by then, with the US national debt well over $50 trillion and annual deficit spending of trillions of dollars, making the US need a massive bailout from foreign creditors, which could well be the end of dollar dominance.
That's why the Fed has been so vocal about asking for interest rate cuts over the past few months, even though inflation has been rising. Just last week, Fed's Jerome Powell said that while interest rates are likely to remain at current levels "longer than expected," he has all but ruled out further rate hikes despite rising inflation data.
As the last piece of evidence to support our view, the Fed has reduced its "quantitative tightening" program, which is essentially the first step towards a new round of quantitative easing (i.e., money printing), because, in the Fed's opinion, the failure of the US government is a worse outcome than inflation, it is clear that they are already adjusting their monetary policy to bail out the federal government.
This is only 2 months away from the "X date" when the US debt default is getting closer and closer to running out of funds, making a catastrophic debt default in the US may become a reality in advance, resulting in such a large debt of the US increasing the risk of eventually being unable to repay the debt and detonating the nuclear bomb of the US debt crisis, and may one day eventually lead to a default on US Treasury bonds and the collapse of the US dollar.
Obviously, this will cause the credit crack in the U.S. financial system to continue to widen, further undermine the credibility of the U.S. Treasury as the core asset of the United States and the consensus of being the anchor of world asset prices, and weaken the cornerstone role of the U.S. dollar in the global financial order, igniting the credit crisis in the United States, which means that global confidence in the U.S. currency has plummeted.
In particular, the U.S. financial manufacturing policy will eventually eat up the dollar, and let the target countries look for alternatives to the dollar, and over time, it will undermine the dominance of the dollar, making Wall Street traders price the next U.S. Treasury bond offering at a higher risk, directly igniting the fear that as many as 186 banks in the United States may fail, weakening the dollar's cornerstone role in the global financial order and commodities including oil, and undermining the consensus that U.S. Treasury bonds are the anchor of world asset prices, igniting the dollar crisis。
Obviously, with the declining status and share of the dollar, it has prompted US allies, including Japan, Saudi Arabia, Israel and Europe, to sell US bonds heavily to reduce the risk of US exposure, because the US dollar is a Ponzi scheme built on a house of cards with a huge amount of debt, without the support of gold, and has long been insolvent.
TD Securities also said in an updated report published on April 22: "Since 2023, although China has increased its holdings of U.S. bonds in some months, it is still the main force of selling U.S. bonds on the whole", according to the data of previous international capital flow reports released by the U.S. Department of the Treasury, since January 2023, China's sell-off of U.S. bonds has accelerated significantly, and it has sold U.S. bonds with lightning speed.
China holds US$775bn of US debt, the lowest level since 2009, and has been selling off for 11 of the last 14 months, in stark contrast to China's 17-month streak of adding around 314t to its gold reserves, according to data released by the State Administration of Foreign Exchange on 7 April.
According to data from the U.S. Treasury Department's latest report on international capital flows released on April 18, foreign investors' investment in U.S. Treasuries continued to decline, with China and Japan being the main sellers of U.S. bonds.
According to the report, at present, China's position in U.S. bonds has continued to fall to $775 billion, continuing to refresh to a new low since 2009, China has been selling U.S. bonds for 23 months in the past 26 months, especially since last year, China's sell-off of U.S. bonds has accelerated significantly, 11 of the 13 months to February this year have maintained a state of selling U.S. bonds, and in the past decade, China's holdings of U.S. Treasury bonds have decreased by 42% China remains the second largest overseas creditor of U.S. bonds, compared with a peak of $1.32 trillion in 2013, with a net sale of $545 billion in U.S. bonds.
Japanese buyers, known for their legendary U.S. bond-buying frenzy in recent decades, are now also pushing for a massive U.S. bond sell-off to defend the yen and JGB yield curve control.
Immediately afterwards, the U.S. financial website ZeroHedge quoted a number of Wall Street economists on April 22 as saying that if the risk of implicit default on U.S. debt and the U.S. banking crisis increases, the global central bank buyers, who are the cornerstone of U.S. Treasury bonds, are expected to reduce their holdings of U.S. Treasury bonds to about 10% of the current level in order to reduce exposure risks and have a chain reaction that is enough to crush U.S. bond prices, which is part of the de-dollarization policy of global central banks.
In these contexts, according to a follow-up report by US media CNBC, some congressional policymakers have put forward the idea that the United States can give priority to major creditors such as China and Japan and some top Wall Street institutions to pay certain debt payments or mint a platinum coin worth $1 trillion to repay debts to ensure that the United States remains solvent, so as to continue the credibility and dominance of the dollar and U.S. Treasury bonds.
China would be one of the first countries to be paid under a proposal by congressional policymakers to prioritize some U.S. debt over others, and the U.S. media outlet said such a plan would ensure that China and Wall Street would be the first to get their debts in return. (ENDS)