Steve Wang — China FX treasure chest restored to more than US$3 trillion

China’s foreign exchange reserves unexpectedly peeked back above the closely watched US$3 trillion level in February, ….

So much for dumping the dollar.

Asia Times
China FX treasure chest restored to more than US$3 trillion
Steve Wang

Bloomberg Special Report — The Untold Story Behind Saudi Arabia’s 41-Year U.S. Debt Secret

The facts confirm the rumors.

Bloomberg
The Untold Story Behind Saudi Arabia’s 41-Year U.S. Debt Secret
Andrea Wong, With assistance from Sangwon Yoon

Barry Ritholtz — Who Owns Treasuries?

Big Picture
Who Owns Treasuries?
Barry Ritholtz

Marshall Auerback — Another Blow To The Deficit Fetishists

Summary of basic MMT on the difference between currency issuer and currency users.

Macrobits by Marshall Auerback

Another Blow To The Deficit Fetishists
Marshall Auerback

J. Benson Durham — Can Investors Use Momentum to Beat the U.S. Treasury Market?

More nails in the coffin of EMH. Momo rules!

Decades of research have produced a library on the “momentum” anomaly in markets. Momentum refers to the tendency for financial assets with the best prior returns to continue to produce superior results, at least for a time. Previous findings—regarding individual U.S. stocks as well as foreign shares, broad equity indexes, commodities, and currencies—contradict the common wisdom that markets are efficient. Curiously, even though the market for nominal U.S. Treasury securities is among the deepest and most liquid in the world, no one has rummaged through government bond term structures to find similar strategies that work, no matter what the future general direction of interest rates. Yet my recent staff report describes simple low-cost trading rules that produce positively skewed and sizable excess returns, merely by directing investors to construct portfolios of maturities that have had superior returns. Neither short sales nor exposure to interest rate risk is required. 

Just how does the strategy work, and what are the risks?....

FRBNY — Liberty Street Economics
Can Investors Use Momentum to Beat the U.S. Treasury Market?
J. Benson Durham | assistant vice president in the Federal Reserve Bank of New York’s Markets Group

David Dayan — More evil than genius? How iPad and Google Glass makers are secretly scamming America

To really understand the extent of Google and Apple’s innovative zeal, you may want to look past their groundbreaking products – and more at their tax avoidance strategies. In a new scheme that defies belief, some of the nation’s top tech giants are managing to evade taxation on money by parking it overseas – and then somehow taking government payments on it....

The tech sector has led the way on this, moving their patents and other intellectual property to low-tax countries to give the appearance that their profits have been earned offshore....

At current tax rates, the companies would have to pay $119.45 billion of that to the IRS if they repatriated it. Much of this money is held in segregated U.S. bank accounts, solely for the purpose of avoiding taxes by nominally keeping it offshore.
Sure enough, tech firms are among the companies lobbying for a repatriation tax holiday, which would allow them to return that money home at ultra-low rates....

But it’s actually worse than all this. A report from the Bureau on Investigative Journalism shows that these tech firms are actually taking government payments on the money they have parked overseas to avoid taxation. That’s because that money isn’t sitting under a mattress somewhere in Bermuda or the Cayman Islands; it’s invested, and the No. 1 investment these firms use is the ultra-safe, ultra-liquid instrument of U.S. government debt.

Salon
More evil than genius? How iPad and Google Glass makers are secretly scamming America

David Dayan

Randy Wray — What If China Dumps US Treasury Bonds? Paul Krugman inches toward MMT

Krugman continues to inch away from ISLM thinking and toward MMT. Witness his latest post:

New Economic Perspectives
What If China Dumps US Treasury Bonds? Paul Krugman inches toward MMT 

L. Randall Wray | Professor of Economics and Research Director of the Center for Full Employment and Price Stability, University of Missouri–Kansas City

Dean Baker — If China Moves Away from Holding Dollars Then It Will be Doing What Bush-Obama Requested

This change could go far toward reducing the U.S. trade deficit, especially if other developing countries follow China's lead as they have in the past. The result would be millions of new jobs and also an important boost to wages. In other words, if China follows through on the path suggested in this article it would be good news for most of the country. Importers like Walmart and companies that have established production facilities in China, like General Electric, might be less pleased.

CEPR
If China Moves Away from Holding Dollars Then It Will be Doing What Bush-Obama RequestedDean Baker

Would also mean higher prices on formerly imported goods now being made in the US unless US corporations could find other low-wage, low benefit, low worker protection countries to export to the US and save in USD. Indonesia?

John Hempton— The Macroeconomics of Chinese kleptocracy

China is a kleptocracy of a scale never seen before in human history. This post aims to explain how this wave of theft is financed, what makes it sustainable and what will make it fail. There are several China experts I have chatted with – and many of the ideas are not original. The synthesis however is mine. Some sources do not want to be quoted.

The macroeconomic effects of the Chinese kleptocracy and the massive fixed-currency crisis in Europe are the dominant macroeconomic drivers of the global economy. As I am trying a comprehensive explanation for much of the world's economy in less that two thousand words I expect some kick-back.

Read it at Bronte Capital
The Macroeconomics of Chinese kleptocracy

by John Hempton

(h/t Steve Keen's DebtWatch)

This is not only about official corruption but "financial repression,
 that is, high domestic saving at artificially low interest rates and negative real returns, forced by economic policy.

Of particular relevance here:

The cost of funds in China and the willingness to hold foreign bonds

The Chinese Government (and the banks are part of the government even though they are listed) has access to seemingly unlimited bank deposits at negative real costs.

When you have copious funds at a negative cost a lot of investments that look stupid under some circumstances suddenly look sensible. US Treasuries look just fine. Don't think the Chinese are going to stop holding Treasuries. The Treasuries yield far more than they pay the peasants. The Chinese make a positive arbitrage on holding low rate US bonds.

Negative interest coming? What was the about a downgrade? Debt ceiling?

(Reuters) - The U.S. government may ask investors to pay for the privilege and safety of holding short-term debt issued by its Treasury Department.

In response to clamor from investors, the Treasury said on Wednesday it was looking closely at allowing negative-yield auctions. This would mean bidders who want the security of U.S. government debt in the face of global insecurity, might have to pay a premium for it.

Doing so would allow the U.S. government to benefit from something that is already occurring on the secondary market, where investors have accepted negative yields in recent months to protect their cash from financial strains.

Remarkably, Wall Street is asking to be able to pay a premium for U.S. debt even after the United States lost its prized AAA rating last year and as the government heads for a fourth straight year with $1 trillion-plus budget deficit.

"It is the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible," according to minutes of the Treasury Borrowing Advisory Committee, which includes 21 financial institutions that make markets for U.S. government securities.

Read the rest at Reuters
Treasury may let investors pay to lend to U.S. government
by Glenn Somerville and Mark Felsenthal

Is Pimco about to lose big again?

We know that Bill Gross made a disastrous move shorting US Treasuries earlier this year. It put his fund at the bottom of all bond funds at least in terms of performance.

Bill Gross may be in for another, big loser. That’s because he has been saying for a long time that he is overweight German bonds (and underweight US) because German bonds were “the safest.”

Once again Gross displays a total lack of understanding when it comes to sovereign bonds and sovereign credit: Countries that don’t issue their own currency—like Germany—are INFINITELY more risky than countries that do—like the United States.

That’s because non-currency-issuing nations are credit sensitive. They NEED the money to pay their debt service, etc. Currency issuing nations pay in their own money of issue, so there is NEVER a solvency problem. (Someone please inform the rating agencies of that!)

From what I can determine, Pimco is heavily long German bonds and the German bond market is starting sell off hard now. Take a look at the yield spread between German 10-year bonds and US 10-year Treasuries. Germany yields are now surging above their German counterparts.

Don’t be surprised if you start hearing some more big loss stories coming out of Pimco!

What if foreigners sell Treasuries? Another myth exploded.

For a long time we’ve heard all the “America is broke, debt-doomsday, we're borrowing from the Chinese” crowd tell us that one day foreigners will start dumping their holdings of Treasuries and interest rates in the US will spike to Greek-like levels.

Well, guess what?

Since August 24th of this year, foreigners have unloaded an unprecedented $100 BILLION of Treasury holdings and INTEREST RATES WENT DOWN!!!!!!!!!!!!!!!!!!!!!!

August 24, foreign custodial holdings of US Treasury securities: $3.49 trillion.
Rate on the 10year Treasury: 2.30%

Nov 2, foreign custodial holdings of US Treasury securities: $3.39 trillion. Rate on the 10 year Treasury: 1.98%

Another myth exploded.