Time Asia Pulled the Plug on U.S. Treasuries: William Pesek Jr.
Nov. 26 (Bloomberg) -- In real estate, it's location, location, location. With markets, it's timing, timing, timing.
Asian central banks should consider this most basic of credos and sell some of their massive holdings in U.S. Treasuries. The reason: this may be as good a time as any for this region's monetary authorities to avoid losses ahead of a possible surge in U.S. debt yields.
The world's biggest economy is experiencing a mix of employment growth, solid retail sales, a sliding currency and record oil prices at a time when inflation already is accelerating. It's the kind of combination that spooks bond investors, and it seems only a matter of time before U.S. yields skyrocket.
Asia's central banks would suffer big losses if that happened. The combined U.S. Treasury holdings of China, Hong Kong, Japan, Singapore, South Korea, Taiwan and Thailand come to $1.1 trillion. Every increase in U.S. yields, no matter how mild, is costing Asia's central banks money. Why not reduce that risk now?
Leaders here have a perfect opportunity to plot an escape from U.S. bonds during the next few days as they gather in Vientiane, Laos. Leaders of China, Japan and Korea, all major U.S. Treasuries buyers, also will attend this year's summit of the Association of Southeast Asian Nations, or Asean.
Asia's Fixation
Of course, it would be even better to see central banks go further. Asia's fixation with weak currencies to stimulate growth led to an unhealthy addiction to dollar-denominated debt. Asia should put that money to productive use here instead of parking it in the U.S., helping finance record deficits.
At the same time, a rising currency is a sign of confidence that attracts more foreign capital, boosting stocks and lowering bond yields. Letting exchange rates rise also puts more pressure on governments to implement reforms to increase domestic growth. And seven years after the start of the Asian crisis, it's hard to argue Asia isn't ready for such a step.
Yet Asians worry the U.S. will go too far in weakening the dollar -- and do so at their expense. Of course, officials here may have a difficult time accusing the U.S. of doing precisely what they've been doing for years: using a weak currency as a crutch. Such an effort by Asians would fall especially flat in Europe, which is bearing the brunt of Asia's policies in the form of record highs for the euro.
A Perfect World?
In a perfect world, Asians would let the dollar plunge. Not only might it stimulate the world's richest economy, but also pressure the U.S. to get its record budget and current-account deficits under control. If so, the global financial system would be better off.
Still, Asians can't help but think the U.S. wants to have it both ways. Dumping U.S. debt might serve as a wakeup call for the Bush administration, which seems to think it can devalue the world's reserve currency to boost U.S. jobs without suffering the side effect of rising debt yields.
Steady Asian purchases of Treasuries are helping the U.S. avoid much of the corresponding rise in yields that comes when a currency falls. If Asian central banks dumped their Treasury holdings, the U.S. would be forced to seek a balance between a softer dollar and rising interest rates.
To Andy Xie, chief Asia economist at Morgan Stanley, allowing the dollar to slide is ``simply another way to get foreigners to subsidize U.S. spending'' so Americans can continue living far beyond their means.
Tough Love
``Asia can fight back,'' Xie says. ``The U.S. uses its superpower status and the advantage of the dollar as the currency for trade pricing and central bank reserves to get foreigners to fund its outsized spending habit. Without a market signal, this U.S. shopping addiction won't stop.''
Call it tough love, Asian style. This region has enabled the U.S. in its addiction to ever-widening deficits. Xie thinks that even if Asian central banks sell Treasuries now and keep the dollars only in cash form, U.S. bond yields could rise 1.5 percentage points. The 30-year bond currently yields 4.83 percent.
``That higher bond yield would stop the merry-go-round among the Federal Reserve, the hedge funds, the Asian central banks and the U.S. consumer,'' Xie explains. ``With higher bond yields bringing down U.S. consumption, the global imbalance would heal.''
U.S. Treasury Secretary John Snow recently pledged that the U.S. would get its imbalances under control. Yet it's hard to keep a straight face when Snow's boss, President George W. Bush, seems set on further cuts in U.S. taxes. Given this administration's track record, that can only mean bigger U.S. deficits.
Doing that would be harder if Asians pulled the plug on U.S. Treasuries. The corresponding jump in debt-servicing costs might force the U.S. to consider actually raising taxes to trim its fiscal deficit. In all likelihood, that might stabilize the dollar and Treasury yields over time as markets bet on for fewer U.S. securities.
``So why take the roundabout way, since the solution is higher U.S. interest rates in the end anyway?'' Xie asks. ``If Asian central banks sold Treasuries now, it would bring the issue to a head.''
To contact the writer of this column:
William Pesek Jr. in Tokyo at wpesek@bloomberg.net, and
.
quote.bloomberg.com |
