Bonds Meltdown Puts Spotlight on How China Could Use Massive Treasuries Stockpile

The deepest losses in US Treasuries in decades are sharpening the focus on China’s holdings of the securities.

(Bloomberg) — The deepest losses in US Treasuries in decades are sharpening the focus on China’s holdings of the securities.

As debate rages about how high US yields may soar, Apollo Global Management economist Torsten Slok has noted that China’s slowing growth means the country has fewer dollars to buy Treasuries. Capital Economics’ Mark Williams said there’s “little evidence” to show Chinese entities contributed to the recent rout in the world’s largest bond market.

China is one of the largest holders of Treasuries, and their purchases are crucial in helping to keep yields anchored in an environment of higher interest rates. A long-standing rift with Washington has fueled speculation that Beijing may shift its foreign reserves out of US assets — a move that would likely add fuel to the bond selloff. 

Yields on 10-year US government bonds surged to a 16-year high this week while those on 30-year notes vaulted past 5% for the first time since 2007. The upward pressure has stemmed from signs that the Federal Reserve is likely to keep borrowing costs higher for longer.

Brad Setser, a former US trade and Treasury official, dismissed the notion that geopolitical tensions have played a part in eroding Beijing’s demand for US securities. Instead, Setser pointed out in a blog post that China has just moved its dollar reserves from Treasuries to agency debt.

“It sort of makes sense – China does worry about the weaponization of the dollar and the reach of U.S. financial sanctions,” Setser wrote in a the post. Yet “the best evidence available suggests that the dollar share in China’s reserves has been broadly stable since 2015 (if not a bit before).”

China has sold $183.1 billion worth of US government bonds since its holdings of Treasuries topped out in November 2013, according to data from the US Department of the Treasury. But it bought $543.5 billion of American agency bonds during the same period.

Still, Apollo’s Slok noted that China has been selling Treasuries at a faster clip in recent months. “Growth in China is slowing for cyclical and structural reasons, and Chinese exports to the US are lower,” he wrote in a note. “As a result, China has fewer dollars to recycle into Treasuries.”

What Bloomberg Strategists Say…

“There’s concern about both supply (how much debt will the government need to sell?) and demand (who will buy all those bonds?). And that dynamic can keep yields elevated and pressure risk assets like stocks and oil”

Felice Maranz, MLIV strategist

Williams, chief Asia economist at Capital Economics, said the numbers do not support the contention that Beijing is shunning US notes. 

“Falls in the value of China’s recorded holdings of US Treasuries tell us little about whether China is divesting from the dollar,” he wrote in a note. “A broader look at the data suggests that it isn’t, despite geopolitical pressure to decouple. The analysis of the US Fed suggests that China has been a net buyer overall,” of dollar assets, he added.

(Updates with tout box of stories and Capital Economics’ comment in final paragraph)

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