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Tue May 14, 2019, 07:49 AM

China - U.S. Treasury Notes

A post in another site proposed that China is considering selling, or not buying our Treasury notes. This would be in retaliation of the Orange Asshole's tariffs.

What would be the economic effect on taxes, tariff, world economy and so forth?

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Reply China - U.S. Treasury Notes (Original post)
3Hotdogs May 2019 OP
beachbum bob May 2019 #1
A HERETIC I AM May 2019 #2
beachbum bob May 2019 #3
A HERETIC I AM May 2019 #4

Response to 3Hotdogs (Original post)

Tue May 14, 2019, 08:00 AM

1. If China would dump US government debt.

 

Flooding the market with Treasuries would push down US bond prices and cause the yields to spike = rising interest rates for govt and private borrowing. Impact? Record federal deficit, state deficits and personal financial losses. Hoard to say, but we could see that 40% drop in US market IF the chinese would do this

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Response to beachbum bob (Reply #1)

Tue May 14, 2019, 09:12 AM

2. Doubtful

China holds around $1.2 Trillion in Treasury paper. Roughly 5% or so.

Since these bonds trade “Over The Counter” and not on an exchange, they would likely sell in lots as opposed to all at once. If a large portion were to hit the market at once, you’re right, prices would fall but by how much is anyone’s guess.

The 30 year has a coupon of 2.88%. If the sale of a large lot affects yield of other bonds offered for sale, the interest cost to the Treasury of those bonds does not change. It only changes when the next auction is conducted and the coupon and price of the bonds is bid up or down.

You said it could force a market correction of up to 40%. That’s not likely.

The reason Yields are so low in the first place is because there is demand for these securities.

Not to mention that the premise of the OP is unlikely because China uses their Treasury holdings to peg the Yuan. Selling off that position would not help them, regardless of motive.

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Response to A HERETIC I AM (Reply #2)

Tue May 14, 2019, 10:11 AM

3. china has recourse and it includes dumping treasuries that would effect US economy

 

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Response to beachbum bob (Reply #3)

Tue May 14, 2019, 11:54 AM

4. Again, they hold roughly 5% of the outstanding debt.

I didn't suggest they had no recourse, hell...they're doing it now;

The CME Group farm futures market sees soybean prices hit a 10-year low before trimming losses Monday.

Falling to $7.92 per bushel, the July soybean futures contract dropped to the lowest price for an active front-month contract in 10 years.

At the close, the July corn futures finished 4¼¢ higher at $3.56. Dec. corn futures closed 4¼¢ higher at $3.76¼.

July soybean futures ended 7¢ lower at $8.02¼. November soybean futures ended 6½¢ lower at $8.26¾.


The point I am trying to illustrate about their holdings in Treasury Bonds is that they hold a relatively small percentage of the whole, and if they did a selloff, I don't think your prediction of a 40% drop in the overall stock market would materialize, much less a massive spike in yields, that's all.

Another thing to consider is that they may very well have bonds that are paying 5 or 6% or more. The 30 year had a 5% coupon as late as 2007. That's $50,000 in annual interest payments for every million dollars face value of that paper. 30's sold today are paying 2.88%. There is nowhere in the world they can go to find government bonds with the reliability of a US Treasury that will pay anything CLOSE to what they're getting now. And again, they use our bonds to backstop the value of their currency, as I indicated above.

The Treasury Bond market is self correcting, to a degree. If yields rise quickly, buyers will flock in and pick up the slack.

Think of it this way;

Put cooking oil into a flat bottom frying pan. Take your spatula and from the center out, scrape away the oil. What happens? The surrounding oil fills in the void you just created. If the puddle is very thin, it takes a while, but it still fills in. If the puddle of oil is deep, it fills very quickly.

You are suggesting that China selling their $1.5 trillion into the market will have the effect of a scraping away a portion on a very thin puddle. That it will have a huge effect and take a while to recover.

I'm telling you the market for Treasuries is VERY deep.

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