China Selling U.S. Bond Holdings has Less Impact than Expected


China has released around $180 billion of US bonds from March to May this year according to government figures, but the effect it has had on US Treasuries was barely noticeable.

U.S. Bonds in Demand

All the bonds were immediately picked up by eager buyers, with the benchmark 10-year yield only dropping by around 60 basis points despite fears that a sell off by China could trigger a meltdown in the U.S. bond market.

Ironically enough, it is the Wall Street meltdown that has reduced the risk from China selling off its estimated $1.47 trillion of U.S. debt. The new regulations created specifically to prevent a repeat of that financial crisis have encouraged banks and similar institutions to store what are now highly rated assets.

Mutual funds have also stepped in as another source of demand for Treasuries, as people investing their savings want more secure and lucrative alternative to bank deposits which pay very little interest. This steady demand stabilizes the market and could encourage the Federal Reserve to raise rates sooner rather than later.

Threat of Foreign Owned Debt

As US debt has continued to rise since the last recession to $12.7 trillion at the last count, in an attempt by the government to boost the economy, nearly half of it was bought by foreign buyers. Currently foreign investors and official state institutions hold over $6 trillion of Treasuries, triple the amount in 2006.

Foreign nations controlling U.S. debt has been a cause for concern for politicians from both sides of the spectrum for some time. Republican billionaire David Koch and Democrat Hillary Clinton both at some point in the past 8 years warned that it could be a possible source of vulnerability.

However, with the demand for ‘safe’ assets such as Treasuries growing, and low inflation preventing the erosion of coupon payments from bonds, it seems that some of those fears may have been exaggerated. While China and Japan are selling, global investors are very interested in buying, making US Treasuries a highly sought after commodity right now, giving the U.S economy one of the boosts it needs.


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