The United States government is very much dependent on foreign investors purchasing U.S. Treasury securities on an ongoing basis. In fact, as our fiscal deficit explodes, it is not an exaggeration to assert that Uncle Sam’s dependence on foreign investment will need to increase.
How interesting that on the day of a $19 billion 10yr Treasury auction, Uncle Sam’s fifth largest foreign creditor has indicated it will reduce its holdings of U.S. Treasurys.
Who might this investor be? Why would they make this assertion? Let’s navigate.
The investor is Russia. As reported by the WSJ, Russia, Supply Fears Gang Up on Treasurys:
The Interfax news agency reported that Russian central bank Deputy Chairman Alexei Ulyukayev said Russia plans to reduce the proportion of foreign exchange reserves it invests in U.S. Treasury bonds. Mr. Ulyukayev said reserves are just over 30% invested in U.S. Treasurys at present, but didn’t specify by how much that figure would fall.
Russia is the fifth-largest foreign owner of Treasurys, according to data from the U.S. Treasury Department. In March, Russia lifted its holdings in Treasurys to $138.4 billion from $130.1 billion in February.
What is going on here? I find this development interesting from a number of angles, including:
1. The fact that Ulyukayev made this statement mere hours before Uncle Sam is selling $19 billion 10yr notes, followed tomorrow by a sale of $11 billion 30yr bonds is the height of “financial aggression.” In layman’s terms, Ulyukayev just spit in Secretary Geithner’s face. What’s up with that? Brinksmanship!!
2. Russia’s equity markets have rallied tremendously this year. Why? Russia is predominantly an oil-based economy. Oil has effectively doubled in price (now approximately $70/barrel from $38/barrel in mid-February) over the last 5 months. Oil transactions are made in U.S. dollars. Thus, Russia is VERY HEAVILY exposed to the U.S. dollar already.
Disciplined and prudent investment management dictates that Russia should diversify their exposures.
3. Political winds are shifting the global balance of power ever eastward. Chinese Prime Minister Wen Jiabao and Russian President Medvedev have both called for a shift in the global reserve currency from the dollar to an IMF issued currency. This statement by Ulyukayev is in sync with Jiabao and Medvedev.
What does it mean for Uncle Sam? All other things being equal, the price to finance our operations here in the United States is going higher.