China Dumps Treasurys, Triggering Worries About US Debt Costs
(Photo illustration: Dollar Photo Club/Rob Williams)
By AP, 11 Sep 2015
China is dumping some of its Treasury holdings in a desperate bid to raise cash to support its ailing markets, a move that “raises serious questions” about the country’s ability to finance the U.S. federal deficit.
If the Asian country stops supporting U.S. debt, the cost of everything that depends on Treasury rates such as home mortgages could rise. Those pressures may deter the Federal Reserve from raising interest rates when its policymakers meet next week.
China held $1.3 trillion of U.S. bonds as of June, making it the biggest foreign owner of the U.S. national debt, which has doubled to more than $18.2 trillion since 2007.
Analysts say the drop in China's Treasury holdings is most evident in the plunge of its foreign-exchange reserves, which fell by a record $94 billion, or 2.6 percent, to $3.6 trillion in August.
China's dollar holdings declined as the country worked to stabilize the yuan, which had been devalued on Aug. 11 by the People's Bank of China. The devaluation triggered fears that the world’s second-largest economy was in trouble.
The worries triggered a global sell-off in stocks that culminated with a record 1,000-point plunge in the Dow Jones Industrial Average on Aug. 24.
"Capital outflows have skyrocketed in China and the yuan is under intense selling pressure. The only thing they could do is sell Treasurys to buy their own currency," Walter Zimmerman, chief technical analyst at United-ICAP, told CNN.
Bullish on Treasurys
Albert Edwards, chief strategist at Societe Generale, remains bullish on Treasurys as a safe-haven investment. He says China’s devaluation will have a domino effect that pushes the global economy into recession and triggers another financial crisis.
“This is the start of something big, something ugly,” Edwards said in an August 12 report obtained by Newsmax Finance. “This move will transform perceptions about the resilience of the U.S. economy.”
An economic contraction would challenge Fed policymakers who have kept interest rates near zero percent since 2008, when the U.S. economy shrank the most since Great Depression. The central bank will publish its rate decision on Sept. 17.
The yield on the 10-year Treasury note is 2.2 percent, little changed from a month ago, in a sign that demand remains healthy amid the turmoil in stocks.