Wary of US Debt, China Shifts Gears on Investment
The signs are there for a collapse of the bond market. The 10 year treasury bond yield has risen by more than 1% and is hitting 3.33%. It is a oversold at the moment and will pause a bit before resuming the sell off.
The FedRes said they will be executing Quantitative Easing by printing money out of thin air and buying treasury bonds. IMO, not only do they have to make up the short fall in demand from the Chinese and other foreigners. They will have to buy up all the excess supply when foreigners dump their existing holdings. If they don’t bond yields will rise to well above 10%. This will put an end to all the talk of ‘green shoots’. If they do buy aggressively to depress bond yields, they will flood the world with USD and create hyper-inflation. Either way America is heading towards the major economic crisis soon.
China is moving to the short end of the treasury market. In the event of a USD or treasury bond collapse, they are limited in their exposure.
Reuters reports :
China has engineered a subtle yet significant shift in the investment of its foreign exchange reserves, a sign of how it is willing to act on concerns about financing an explosion of U.S. debt.
Beijing has been far and away the single biggest foreign buyer of Treasuries over the past year, but this apparent vote of confidence belies how it has turned its back on long-term U.S. debt in favor of shorter maturities.
China’s move to the shorter end of the U.S. debt spectrum is a defensive tactic adopted by the wider market as well on the view that the United States will have to raise interest rates down the road to control inflationary pressures when the economy recovers from the financial crisis.
But the shift also comes after pointed comments from Beijing expressing worries over the security of its U.S. investments and calls from Chinese government economists for a tough line with Washington in return for continued access to loans.
“The United States is making policy decisions purely according to domestic considerations and is giving little thought to the outside world,” said Zhang Ming, an economist at the Chinese Academy of Social Sciences (CASS), a leading think-tank.
“This being so, the Chinese government should prepare its defenses,” he said. “We can keep buying U.S. debt but we have to attach some conditions.”
But China’s leverage may be limited, despite sitting on the world’s largest stockpile of foreign exchange reserves at $2 trillion. The very surge in U.S. debt — the Treasury plans gross issuance this fiscal year of $8 trillion — means China’s heavy buying is increasingly looking like a drop, albeit a very big one, in the ocean.