Moscow Mystery: Where Did All Its Treasuries Go?

(Bloomberg Opinion) -- U.S. bond traders are fixated on Russia this week for a much different reason than most Americans.

Just a day after President Donald Trump’s much-maligned meeting in Helsinki with Russian President Vladimir Putin, a monthly report from the Treasury Department showed that Russia is no longer considered a “major foreign holder” of U.S. government securities. That’s because in the two months through May 31, the nation’s Treasuries hoard plummeted to just $14.9 billion from $96.1 billion. The threshold to be considered a major holder is $30 billion. There are 33 of them.

Such an aggressive reduction is not normal. To put the $81.2 billion decline into context, the most Japan has ever cut back in a two-month stretch is $47.8 billion. China, the largest foreign owner of Treasuries, has scaled back to a similar extent on occasion, but it was a mere fraction of its total. For Russia, once a top-10 holder, this looks like a full-scale liquidation. Since the start of 2017, no country’s holdings have fallen more, either on an absolute or percentage basis.

Moscow Mystery: Where Did All Its Treasuries Go?

No one in the world’s biggest bond market is quite sure what to make of this. One theory is that this apparent selling is linked to U.S. sanctions on Russia. As a reminder, almost 700 Russian citizens and companies face limits on their travel and a freeze on their assets, while some top state banks and companies are effectively barred from obtaining financing through U.S. banks and markets.

A more benign explanation is that the Treasury International Capital data is murky and that Russia’s U.S. securities might just be held in a different country. Cayman Islands’ holdings are up $20 billion in the past two months, for instance. Don’t expect the Treasury to clarify things publicly: a spokesman told Bloomberg News that the department doesn’t comment on individual investors or investments.

One thing’s for sure: If Russia was strategically selling, expecting U.S. interest rates to climb, it had awfully poor timing. Treasuries did tumble during the period, with the benchmark 10-year yield soaring to 3.11 percent in mid-May, the highest closing level since 2011. But it hasn’t come close to testing that peak since.

Now, if Russia really did offload the majority of its Treasuries, that surely contributed to the march higher in U.S. borrowing costs. Ian Lyngen at BMO Capital Markets quipped that “The market now has the answer to what would happen to Treasuries if a major holder decided to sell everything.” That would be a measly 11 basis points — the difference between 10-year yields at the end of March and the end of May.

Of course, as Lyngen goes on to say, China and Japan, with more than $2 trillion of holdings between them, could do far more damage to the $15 trillion Treasury market if they ever decided to sell en masse. And with the Trump administration launching tariffs on Chinese goods, it’s tempting to ponder how much yields would rise in that scenario. But as I’ve detailed, offloading Treasuries is largely a last-resort option for China, given that it has to manage a massive amount of foreign-exchange reserves. Japan has already been scaling back.

For now, Russia’s mass exodus from U.S. Treasuries is largely a bond-market curiosity that bears watching. It’s no secret that political tensions are high between the two countries. If Russia further removes itself from financing America’s swelling national debt, Trump might have another topic to discuss with Putin at their next meeting.  

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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