The U.S.Treasury's monthly report on capital flows has been released again,with China continuing to sell off U.S.Treasury bonds.

Amid simultaneous sales of U.S.Treasury bonds by China,Japan,and several countries and regions in Asia and Europe,the prices of U.S.Treasury bonds have once again experienced a comprehensive decline,with the yield on Treasury bonds of various maturities rising again.

The U.S.Treasury is constantly urging Congress to approve a new debt ceiling,which has led to a very difficult contradiction within Congress.

01,China and Japan join hands

The U.S.Treasury releases a TIC report every month.Although the data is always two months old,we can still clearly see the situation of U.S.Treasury bonds held by various countries through this report.

After the latest report came out,the situation for the whole of last year has become very clear.The data involved in some earlier months has been adjusted,but the overall trend has not changed.

In the latest monthly data,China and Japan sold U.S.Treasury bonds synchronously,but the scale of the sale has slightly decreased.Japan sold $6 billion,and China reduced its holdings by $3.1 billion.

Looking at the entire year of 2022,Mainland China and Japan together reduced their holdings of U.S.Treasury bonds by $397.7 billion,with Japan selling $224.5 billion and China selling $173.2 billion.

Currently,Japan,the largest foreign creditor of the United States,only holds a balance of U.S.Treasury bonds of $1,076.3 billion,and there is also the possibility of falling below $1,000 billion in the short term.

02,U.S.Treasury bonds fall againStarting from March 2022,the Federal Reserve's monetary tightening policy has been continuously intensified,and it began its first interest rate hike.Subsequently,the magnitude of the rate hikes has been increasing,with four consecutive instances of a 75 basis point increase.

At present,the United States has raised interest rates by 450 basis points.The continuous increase in the federal funds rate is one of the reasons driving the constant rise in U.S.Treasury yields.

However,another significant reason for the rise in U.S.Treasury yields comes from the continuous selling by holders.The liquidity in the U.S.Treasury market is becoming increasingly scarce because the scale of active selling far exceeds that of active buying,leading to a continuous decline in Treasury prices.At its worst,the U.S.Treasury index fell by as much as 18% last year.

Recently,U.S.economic data still reveals signs of overheating,which increases the possibility of the Federal Reserve raising interest rates significantly again.

U.S.Treasuries have begun a new round of decline,with the yield on five-year Treasury notes already breaking through 4%,a significant climb compared to when it fell below 3.4% in January.

The yield on six-month Treasury bills has even surpassed 5%,reaching a peak of 5.054%,which is higher than the yield on one-year U.S.Treasuries.

The most closely watched is the yield on the 10-year U.S.Treasury note,as many financing rates are closely related to this term,which has also risen above 3.75%.

In addition to the continuous rise in U.S.Treasury yields,reflecting the continuous decline in Treasury prices,we have also observed another trend: the yields on short-term U.S.Treasuries have increased more significantly,leading to an increasingly severe inversion between short-term and long-term debt yields.

03,The Dilemma of the U.S.Congress

In addition to the liquidity issues caused by continuous selling,U.S.Treasuries now also face the potential problem of default at any time.By the end of 2021,the United States Congress had set a debt ceiling for the Treasury Department at $31.4 trillion.However,by the end of 2022,the balance of U.S.debt had approached this limit very closely.

Yellen has sent two consecutive letters to the U.S.Congress,requesting an increase in the limit,but so far,the U.S.Congress has not dared to make this decision.

Because raising the limit again may imply a more significant sell-off of U.S.debt by institutions and central banks holding it in the market,plunging U.S.debt into a greater crisis.

Perhaps the issue of the U.S.debt ceiling will be prolonged in the contradictions of the U.S.Congress,until it eventually erupts.

What China needs to do is to reduce its holdings of U.S.debt as much as possible before the crisis finally erupts,to minimize losses.