Saturday, April 16, 2016

The Saudi “Threat” to Dump Treasuries

A bill now going through Congress would chip away at Saudi Arabia’s sovereign immunity defense against claims that they abetted the 9/11 terrorists, which they apparently did.  The Saudi government, with its tender commitment to due process and human rights, has threatened to retaliate by selling its hoard of US treasuries.

You’d have to be pretty naive to tremble at this.  For every sale there has to be a purchase, so the Saudis have to find buyers for these bonds.  Presumably the buyers will be those who hold close substitutes (relatively risk-free sovereigns issued by other secure states), who can be induced by a small premium to rebalance their bond portfolio in a dollar-denominated direction.  Meanwhile, the Saudis will likely take the cash and purchase these other, non-US, sovereigns.  The result will be a slight temporary decrease in the price of treasuries and perhaps a slight easing in the value of the dollar, which would actually be good news for the US economy.  (Although my understanding is that most of the actual accounts in which the Saudi-owned treasuries are held are located in London; correct me if I’m wrong.)  If the Fed had any concerns about the one-time selling pressure against treasuries it could quantitatively ease by buying a bunch of them itself.

Of course, maybe this is desperation disguised as bluster.  With the fall in oil prices, the Saudis may need to liquidate some of their holdings to keep their race horses properly groomed and fed.  Why not portray this is a weapon to prevent disclosure of its past deeds?


Bruce said...

It's worse than that. The point of the Saudi threat is to hurt the US by reducing the price of Treasuries by greatly increasing the available supply. Thus they would be driving down the price of their own asset. The only people who would lose are the Saudis. For the reasons you say, prices would quickly go back to where they were and those who bought these fire-sale priced bonds would profit at the Saudis expense.

Peter T said...

It's less about any possible gain or loss than exposure to fairly arbitrary US claims. Why would Iran, Argentina, Saudi, Pakistan, Gulf States, Russia or any other state exposed to this sort of action keep money where the US can freeze it? Over time, it's a significant weakening of the US hold over the world financial system.

Bruce Webb said...

I have been posting on this for a couple years now at Angry Bear but no one seems to want to engage.

One you have to disaggregate Treasury Bills, Notes, and Bonds. Bills and Notes in the age of the ZLB are just dollar equivalents, who cares if investors dump securities carrying sub 1% yields or coupons. They are just selling dollar instruments officially carrying negative real rates (bills and notes) for actual dollar deposits that if anything should be carrying even more negative rates but still unaccountably are in demand. "I'll show you!! I'll exchange all these Bills and Notes denominated in $1000s for stacks of Benjamins and rolls of Quarters!!"

Whatever Dude.

Which leaves Bonds. Which actually carry Debt Service costs in the way of twice yearly interest payments and mostly have coupon yields that are clinging to non negative real rates. But Treasury Bonds are a fairly small fraction of Debt Held by the Public and due to the two rounds of Qe1&2 are just about 70% held by the Fed. Leaving a relatively small fraction out there to be held by the Saudis or the Chinese (also the subject of 'dumping' claims on the sketchy financial sites at the bottom of every news website out there "Hi Peter Schiff!!") The question no one seems willing to answer is how much exposure the the U.S. 'long bond' actually has worldwide, as opposed to holdings of Bills and Notes, and whether any entity whether sovereign wealth fund or Central Bank could really drive rates above Fed targets by dumping their holdings. Or whether this is all projections of a fart in a hurricane.

My investigations of public data sources suggest 'fart'. Then again my actual credentials on this and frankly my math chops put me at a disadvantage here. Which is why I have been putting this in the form of a question for YEARS now. And getting no answer. So lets put the question again:

Do either the Saudis or the Chinese have sufficient actual holdings of Bonds with coupons over 2% that dumping them would have ANY impact on the ability to sell new 10 year and longer securities into the market at near current rates? Please edikate this moran.

Bruce Webb said...
(in billions of dollars)
Per this table of the $6.2 trillion of Treasuries held overseas, and which would include Bills, Notes, and Bonds, the total holdings of the Saudis and ALL OTHER MIDEAST oil producers are encompassed somewhere within the straightforward "Oil Exporters" at $281 billion plus some proportion of offshore holders "Carib Bkg Ctrs" $361 billion, UK (including Channel Islands and Isle of Man) $236 billion and perhaps Switzerland, Luxembourg etc. But in those last they would be competing with oligarchs from around the world.

So totaling it all up how much exposure does the U.S. Treasury Bond have to any individual world actor? Because there is an odd tendency to equate "Foreign Reserves of U.S. Securities and Assets" with "Treasuries" when clear the later are a smallish fraction of the former. In particular there just are not that many Long Bonds out there.

Peter T said...

Why would any government leave its money where things like this can happen? Or not be prepared to take a small loss to guard against the risk?