Can the US Treasury Market Absorb a $750 Billion Saudi Arabian Fire Sale?
On Sunday, April 17, the New York Times reported that Saudi Arabia threatened to dump its U.S. Treasury holdings if a bill stripping the Saudi Arabian government of its immunity against private lawsuits relating to the 9/11 attacks were to pass. The objective of the bill is to allow victims of the 9/11 attacks to sue the Saudis for their alleged involvement and financing of the infamous mass murder. The Saudi statement can either be read as a threat or simply as a notification, depending on what the objective is. After all, if and when the Saudis lose their immunity, their entire horde of U.S. Treasuries would be subject to confiscation by American courts. They would have no choice but to sell them regardless of the price they get before any court-ordered freeze could be initiated.
The question is, if that were to happen, could the U.S. bond market absorb the wave of selling without a panic drop? That depends on what the Saudis’ intentions are. If they are interested in preserving their assets and choose to liquidate their $750 billion over a year or so, assuming they have a buffer to do this before being convicted of anything, then the bond market should remain stable. If, however, they are actually interested in hurting the dollar or do not have sufficient time to spread out the liquidation and choose to dump the entire horde onto the market at once, that’s a different story. How so?
According to the Securities Industry and Financial Markets Association (SIFMA), the size of the U.S. Treasury market as of December 31, 2015, is $15,141.1 billion, or just over $15 trillion. Saudi Arabia holds about $750 billion of that total, behind China’s $3.2 trillion and Japan’s $1.3 trillion. That means those three countries together own 35% of the entire U.S. government bond market. While that’s not all your eggs in one basket, it’s not a situation that lends itself to long-term stability.
While Japan’s holdings have been steady since 2012, China’s have fallen 20% since 2014, for an absolute fall of $780 billion in 21 months. Despite that sell-off, interest rates on US government debt have not increased since China began liquidating its Treasuries. That means a $780 billion liquidation in under two years is absorbable, since it just happened. Given that interest rates on the 10-year actually have declined 32% since June 2014, the Saudis may even be able to squeeze the selling time frame to as little as six months to a year without significantly altering the bond market.
However, if the Saudis panic or intentionally dump their entire holdings on the market at once in a revenge move, the bond market could crash, sending interest rates skyrocketing. According to JPMorgan, the amount of Treasuries that can now be sold in 2015 without affecting price is $80 million worth, down from $280 million in 2014. This may be due to China’s ongoing liquidation. Since the Chinese are no longer significant buyers, liquidity has dried up. The $80 million number is based on bond yield fluctuations on October 15, 2014, about four months after China became a net seller of Treasuries. On that one day, bond yields fluctuated 14% from highs to lows, something that had never happened before.
The bottom line is that since China has become a net seller of Treasuries, liquidity has dried up. A $750 billion bond dump all at once could see interest rates rise much more than the brief 14% fluctuation on October 15, 2014. It all depends on whether the Saudis issued a threat against the dollar or simply a notification, and whether they will have time to spread out their selling if the bill passes. In any case, if it does pass, the U.S. Treasury market will get quite rocky.