The ongoing trade talks between the US and China continues and it is transparently obvious that neither side is ready to give in, so the options turn from talks to actions as the US hikes tariffs on Chinese made goods to 25% from 10% and keep in mind that the US imports $420 billion net on a year like 2018. Of course, the tariffs are clearly enacted to add pressure to the economy which Beijing is working to keep on an even growth trajectory. But China has suggested that it will respond and would do so in the US debt markets.
China is the largest holding of US Treasury bonds, from short maturities to long maturities – out to 30 years. China now holds $1.2 trillion of US Treasury debt. The fear that is growing in some circles is that China could start to sell these bond holdings which would drive up US interest rates and of course kick the US economy to the curb as the trade war starts to become a heated fight with no way out. But one word of caution. We have staff that worked in the US and Japanese bond markets and the point is simple.
When we look at the so-called massive bond holdings of $1.2 trillion dollars, it is seen as small as the total outstanding bonds outstanding is $22 trillion. When looking at overseas owners of US debt, the China slice of the pie is 17%. The Nuclear Option is more like a hand-grenade and although it could do damage, aggressive selling of US bonds would likely be absorbed quickly. China has sold some bonds but only $46 billion over the past 12 months, again not a very large number given the volume of bond trading is hundreds of billions of dollars each month. The last data we found was from 2017, in which $500 billion was traded each day.