Bond Vigilantes May Be Ready to Force Higher Rates

It’s no secret that China and other creditors have been very unhappy with the enormous debasing of the U.S. dollar. Their displeasure is measured not only by their words but also by the sharp decline in the portion of Global U.S. Dollar Liquidity that is made up of foreign bank holdings of U.S. Treasuries. While the current levels of around 60% are still higher than prior to the fall of 2004, the sudden drop may be telling us that the game of borrowing from foreigners may well be coming to an end.

But not only foreigners may be getting ready to dump U.S. Treasuries. We noted that Pimco is also is dumping $26.5 billion in U.S. Treasuries and mortgaged back securities to go to cash, as reported by Tyler Durden on 12/17/09.

PIMCO Sells $26.5 Billion in Treasuries and MBS in November, Goes to Cash

“Pimco’s flagship Total Return Fund released its November data: the fund continues liquidating its MBS holdings, selling another $7 billion in November (after dumping $10 billion in October), and bringing the total to the lowest it has held of this security, at $23.9 billion. Keep in mind TRF held just under $120 billion of Mortgage Securities in February—a nearly $100 billion reduction. Thank you, Ben Bernanke! Bid mortgages are not the only class getting cleansed by Gross: the world’s biggest bond fund also sold $20 billion of Treasuries, bringing its government holdings to $101.7 billion, down from $121.3 billion in November. The biggest beneficiary? Cash, which increased from a net short position of -$13.5 billion to $14 billion. And in the meantime, the fund still made a boatload: total AUM in TRF increased from $192.6 billion to $199.4 Gross is sticking to his pessimistic view and liquidating. Who is buying?”

Jay Taylor
Gold Investor