China, Bonds & the Dollar

US Treasuries extended their losses after regulators in China asked local banks to curb their holding of US bonds. It’s being  framed as a “diversification” issue, but it doesn’t apply to China’s State banks. So this really just Beijing and Washington jockeying for leverage ahead of a US/China summit scheduled for April. It won’t help the sliding dollar, but the headlines are more dramatic that the effect. Here’s why:

The 4717 Shot: China has been reducing its holding of US treasuries since the early 2010’s, and now holds about 8.9% of all US foreign owned debt. What is new is that a fed-up Europe – which collectively accounts for 10% of foreign held bonds – is now included in the chatter about rage-dumping US bonds to cause market havoc and terrorize President Trump. While it’s technically true enough that that banks in China and Europe of could sell the lot, but they’d have to find buyers.. A determined seller on a mission will play hell with the market price of anything – so they’s be wrecking the value of their own holding. And the only capital market deep enough to facilitate that kind of buy is the US.

Since the financial crisis of 2008/09 there has been a shift away from US treasuries, but not American assets more broadly. Some 60% of foreign owned assets in the US are equities. Meaning the world’s investors are still betting on America. Maybe not its manic government, but on its dynamic markets and - specifically - AI. The dollar is sliding, but it has a long way to go.

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