Russia Dumps US Bonds – Is it Politics or Yield?

QUESTION: Mr. Armstrong; It appears that Putin also follows your model. He has been selling all debt significantly for it seems he is listening to your forecast that interest rates will rise sharply so get out of government bonds. Do you see his selling because of rate increases or politics as some are trying to say?

Thank you

KE

 

ANSWER: Putin is selling off debt very rapidly because of interest rates. The political bashing of Russia has been going on since the 2016 presidential election. It has contributed somewhat to the decision to sell, but honestly, if it were only political, then they would have sold their holdings by the end of 2016. The spin will be political, but the trend toward higher rates is the real driving force. Many countries/corporate/institutions that our clients, we have been advising to shorten maturity.

The crisis is building in debt rapidly. Even the ECB came out and said it would stop its bond-buying program and only a fool would expect rates to stay the same. I seriously doubt, based on my sources, that the ECB can stop buying bonds without a major global crisis. Draghi will keep buying until he is out the door come October 2019. I seriously question if Draghi will be able to hold it together beyond the First Quarter 2019.

Russia sold nearly all of its US Treasury holdings in May. It was an impressive sale reducing their holdings to almost zero in just two months. According to our sources, the Russian government reduced its US bond holdings from $ 96 billion to $ 48.7 billion during April and then down to $14.9 billion by the end of May. At the end of 2017, Russian holding of US debt stood at about $102.2 billion. That was not actually huge. They were in the top 33 countries holding US debt.  They are certainly no longer in that list at all. The Russian sales pushed the yield slightly higher to 3.11%.