China To Dump US Bonds

Today the bond market sold off due to rumors that China, one of the largest holders of US debt, is considering slowing or completely stopping its purchases of US treasuries. This news caused the bond market to sell off and treasury yields to spike upward, since the two are inversely related.

The “Bond King” Bill Gross also came out today to state that he felt that the three decade long bond bull market is over. [1]

A Zero Hedge article points out that a large selloff by China all at once is unlikely since doing so would require a large period of time to liquidate $1.2 trillion in treasuries and may cause a rescission in their country.

There is also question about whether or not a sale by China could actually impact treasury yields in a significant way. The article cited a comment form Ye Xie (Bloomberg):

“If anything, one could make an argument that a reduction in China’s holdings could, at times, drive down yields, instead of pushing them up, as shown in this chart. When the PBOC sold Treasuries in its foreign reserves in early 2016 to offset capital outflows, it may have helped spur demand for safe havens from investors who were concerned about a China crash. As China’s economy started to recover in the second half of 2016, it resumed the purchases and the yields went up slightly.” [2]

Despite this, it is concerning how much of an impact an unconfirmed rumor about China’s plan can impact the market (especially since it has been known for a while that China was planning on diversifying itself out of US treasuries). The Dow Jones Industrial Average intra-day was down over 130 points, it recovered before the close.

Curiously a huge surge of buying began in the middle of the day causing a rebound in the bond market and most likely is the cause for the rebound in stocks.

This news is very close to the launch of China’s Petro-Yuan which is supposed to start on January 18, 2018. This oil futures contract is tradable in China’s domestic Yuan currency and is a direct challenge to the Dollar taking away its reserve status by competing with its global trade dominance. This is part of Chinese President Xi Jinping’s “One Belt, One Road” plan to develop trade ties with Asia, Eastern Europe, and the Middle-east excluding the US. [3]

Notes:

[1] https://www.bloomberg.com/news/articles/2018-01-10/china-officials-are-said-to-view-treasuries-as-less-attractive
[2] https://www.zerohedge.com/news/2018-01-10/has-china-been-quietly-selling-us-treasurys-here-answer
[3] https://www.silverdoctors.com/headlines/world-news/the-petro-yuan-cometh-january-18th-and-the-launch-could-coincide-with-a-debt-reset-among-nations/