There’s nothing to see here, folks. Keep moving.
It’s a fake news story, for several reasons.
First, the story is less than unattributed. It doesn’t even cite sources at a particular state institution but only “people familiar with the matter.” The story reads, “Senior government officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of US Treasury securities according to people familiar with the matter.”
Second, China doesn’t signal major policy changes through American news organizations that it previously has kicked out of the mainland. It does so via Chinese-language state media and not a whisper of a policy change appeared from there.
Third, and most important, Chinese holdings of US Treasury securities haven’t changed much in the past five years. Neither have any other foreign holdings of US Treasury securities. The biggest change in Treasury holdings came from the US Federal Reserve, which increased its net holdings by nearly US$1 trillion under its quantitative easing program, not to mention a couple of trillion dollars of mortgage-backed securities.
It must have been a slow news day.
US Treasury yields have been rising, to be sure, but virtually all of the increase is due to higher oil prices.
The chart below plots the 10-year Treasury yield against the spot price for West Texas Intermediate crude:
As Asia Times reported yesterday, the inflation component of Treasury yields absorbed almost all of the increase since December 1st because rising crude prices feed directly into the Consumer Price Index. So-called real yields, that is, the yield on Treasury securities indexed to the Consumer Price Index, are pretty much where they were five weeks ago. All we have seen in the Treasury market is an adjustment to higher oil prices. Until 5:00 a.m. New York time on January 10th, that is, when Treasury yields bounced a bit after the Bloomberg story appeared.
It’s not as if markets are panicking about the US government bond market or the dollar. US stocks as of 12:00 p.m. January 10th were down fractionally, with the Dow Jones Industrials losing just 11 points, or 0.04%.
In the medium term, to be sure, America’s deficit, now at 3.4% of GDP, and its current account deficit, at 2.3% of GDP, give investors something to worry about. The US can’t go on borrowing forever and the world won’t let the US finance its deficit via the balance sheet of the Federal Reserve forever. But the rest of the world has been happy to own dollar assets for the past five years. We know this because purchases of gold – the ultimate insurance against the dollar – have been declining for the past five years.
We have seen a modest uptick in the gold price during the past few months. Most but not all of that is due to the weakness of the dollar. It’s a trend to watch but still a distant radar blip.
We wouldn’t buy Treasuries (or other sovereign bonds) just now. Oil prices are rising, US economic growth is higher and central banks will gradually reduce their enormous holdings of government securities. That suggests somewhat higher bond yields. China will continue to manage its portfolio of government bonds to its best advantage, the same way that other bond investors manage their portfolios.
And Bloomberg will have to come up with something different on the next slow news day.