The conventional wisdom is that the US is beholden to foreign agents as they hold much of the US government debt. In this view, if these agents sell their securities, interest rates in America should increase as demand for US public debt evaporates.
Now comes evidence that China is indeed selling. The BBC reports.
China reduced its holdings of US government debt by the largest margin in nearly nine years in June, according to data from the US Treasury.
China holds more US government debt than any other country and cut its holdings of US securities by more that 3% in June, said the BBC’s Chris Hogg…
The sales were made as the US treasury secretary was visiting Beijing to try to reassure the Chinese that their investment in his country’s government debt is safe…
In 2008, the Chinese increased their holdings in US debt by 52% over 12 months.
“China has said it would like to establish an alternative to the US dollar as the world’s favoured currency for foreign exchange reserves,” said our correspondent.
“So far there is no evidence that there is a suitable alternative. But these figures suggest they are exploring ways to diversify their investments where they can.”
But, as you have probably noticed, interest rates have not increased appreciably. What gives? Two ideas:
- The Chinese aren’t selling because there aren’t enough alternatives. Just yesterday, there was a Bloomberg article indicating the Chinese are still very much interested in buying US public debt. They may even being moving out on the long-end of the curve.
- The premise that interest rates will increase is false. If the US economy slows, this automatically decreases the current account deficit, meaning the US becomes less dependent on foreign sources to buy Treasury securities. Increased private sector savings suggests more domestic sources of Treasury funding are now available.
On the whole, I would expect interest rates to rise as government budget deficits increase. However, I have just presented you two reasons why this might not be so.
Originally published at Credit Writedowns and reproduced here with the author’s permission.