Lower Dollar to Sell More Treasuries?

Is that what Geithner and Bernanke have been doing?

Treasury Secretary Timmy Geithner periodically espouses his "support" for stronger dollar, no matter how he may get ridiculed. Fed Chairman Ben Bernanke recently said he was "watching the dollar drop closely". He may have meant that he was watching the dollar closely to make sure it weakens in an orderly manner, but it was generally interpreted as he is concerned about weak dollar. Even the spendthrift president of the U.S. chimed in, saying he was concerned about the growing government debt.

Weak dollar means stronger Euro, yen, yuan, ruble, real, etc. Foreigners who holds U.S. dollar-denominated assets (majority of them in the form of Treasury notes and bonds) doesn't like to see their assets decline in value as the dollar tumbles. So what do they do, other than protest to Geithner and Obama when they have a chance?

They buy U.S. Treasuries.

According to the Treasury Department's Treasury International Capital (TIC) data released on November 17, foreigners (including foreign central banks) increased their holdings of U.S. Treasuries in September. Treasury auctions of all durations continue to enjoy decent bid to cover ratios, and the rates are getting lower.

In September, total foreign Treasury holdings increased from $3,452.9 billion in August to $3,497.3 billion. It is a fifth-consecutive increase since April this year, coinciding with the stock market turnaround. Year over year, it marks 25% increase. Foreign central banks hold $2,369.5 billion Treasury bills, notes and bonds, or 68.6% of the total foreign holdings.

Foreigners, governments and private entities alike, are defending the dollar by buying up the Treasuries.

So, Geithner, Bernanke, and Obama don't need to do a thing. They can just sit pretty, occasionally express their verbal support for a stronger dollar to placate the foreign creditors, and simply let the dollar slide gradually. As long as the slide is gradual, they can rope in more and more buyers who hope to arrest the decline of their asset value by buying up Treasuries.

Some might say they can't do a thing. If the dollar strengthens too much or too rapidly, that would jeopadize the dollar carry trade, particularly the one engaged by the foreign governments (issuance of U.S. dollar-denominated bonds; here's a post from October, by The Debts of a Nation blog).

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Russia Set to Reduce US Treasury Exposure

Today is the much dreaded day of 10-year Treasury note auction. In anticipation of not so steller result (particularly after Chinese students laughed at the US Treasury Secretary), the yield on 10-year note has popped above 3.9%, and the 30-year bond yield is 4.71%.

The stock market is also under pressure, probably from this impending auction. Dow Jones Industrial Average is down about 30 points to 8,732, S&P 500 down 4 to 937. Nasdaq is the worst performer, down 22 points (-1.21%) to 1,837.

The bond market doesn't need any more negative news right now, but it got one this morning. It came from Russia, the 5th largest foreign holder of US Treasury securities. (If you exclude Carribean Banking Centers and Oil Exporters, Russia is the third largest holder. Here's the link to the lateset TIC from the Treasury Department.

Russia to Sell US Treasurys, Buy IMF Bonds (6/10/09, CNBC):

"Russia will reduce the share of U.S. Treasurys in its foreign exchnage reserves, the world's third-largest, a senior central bank official said on Wednesday, driving the dollar broadly lower."

"Russia holds about 30 percent of the reserves, worth $404.2 billion, in Treasurys. Central bank First Deputy Chairman Alexei Ulyukayev said it would buy bonds issued by the International Monetary Fund and also up the share of reserves held in bank deposits."

"Ulyukayev said Russia had increased its investment in liquid treasuries during the peak months of the crisis and was now ready to cut it...."

Ouch.

The Russian holdings of US-dollar denominated assets including Treasuries and agency bonds fell to 41.5% as of Jan 1, 2009, from 47% a year earlier. Their Euro holdings increased from 42.4% to 47.5% during the same period, but as the net position, US dollar was still 47%, Euro 41%. (See this article for more detail.)

Russia also holds 523.7 tonnes of gold reserve, 4% of the total reserve. Russia and China already expressed interest (see my post) in yet-to-be-issued IMF bond/note.

One more hour to go before Treasury announces the auction result...

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