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No Seller, Let Alone China, Can Disrupt US via Selling US Treasury’s…But the “Why” Ain’t Good

No Seller, Let Alone China, Can Disrupt US via Selling US Treasury’s…But the “Why” Ain’t Good

I often read that China may retaliate against US trade sanctions by further decreasing their US Treasury holdings, sending Treasury yields significantly higher, thus blowing out US deficit spending on interest payments.  Trouble is, Chinese Treasury holdings peaked in 2014 (on an annualized basis) and have been declining since.  The Chinese have not only ceased accumulating US Treasury debt, despite continued record trade surplus’ with the US resulting in significant dollar surplus’, but have been decreasing their holdings.  All this, according to the Treasury International Capital (TIC) system.

But this postulation that the Chinese could wound the US via selling a portion (or all) of its Treasury holdings (as Russia recently did) is submarined by the recent actions of the Federal Reserve.  I say this based on the magnitudes greater accumulation and subsequent dumping of specific maturities of US Treasury debt done by the Federal Reserve.

The Federal Reserve accumulated almost $800 billion in 7 to 10 year US Treasury debt (red line, chart below) from 2009 to 2013, and then subsequently dumped $600 billion from early 2014 through the most present August 2018 data.  And the impact on the 10 year yield (blue shaded area, chart below)…essentially zero.  Yes, while the Fed rolled off and/or sold off 7 to 10 year holdings, they were busy buying short term debt.  But this still meant someone had to step up in duration and buy all that longer duration debt the Fed no longer wanted.

To put the relative size of China’s 7 to 10 year holdings in perspective to the Fed’s like holdings, the chart above estimates that a third of Chinese Treasury holdings (likely an overestimation) were of the 7 to 10 year variety (gold line).  The Fed has already rolled off / sold off 1.5x’s more 7 to 10 year debt than the Chinese even have.  

…click on the above link to read the rest of the article…

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