Treasuries and Trade Negotiations

The threat of China selling a portion of its $1.2 trillion in Treasury holdings in response to the recent ratcheting up of trade tensions makes for good headlines, but may not be a prudent decision. Regardless, recent data actually show the Chinese doing just the opposite, as illustrated in our LPL Chart of the Day. LPL Research Chief Investment Strategist John Lynch explains, “Going behind the headlines, the most recent data from the U.S. Treasury indicates that China actually increased its holdings of U.S. debt during February. More updated data will be available on May 15, which could give investors more insight into China’s intentions.”

If China did start to sell large quantities of Treasuries, it would have the potential to push U.S. rates higher and put pressure on the U.S. economy; however, such a strategy would ignore the interconnected nature of the world economy. The U.S. imported more than $500 billion of Chinese goods and services in 2017 (according to U.S. Census Bureau data), making it China’s largest trading partner. A severe downturn in the U.S. economy would lead to less demand for Chinese products, lower investment, and an inevitable downturn in its economy as well. Additionally, if China took the step of converting proceeds of Treasury sales (in dollars) to Yuan, it could strengthen China’s currency, which would have negative implications for the country’s exports and thus its economy broadly. So while this narrative makes for great headlines, we believe it is ultimately not a viable negotiating tactic. For more information on this topic, please see this week’s Bond Market Perspectives.

 

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Treasuries are a marketable, fixed-interest U.S. government debt security. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level. Treasuries are subject to market and interest rate risk if sold prior to maturity.

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