Abacus | The only game in town? Why China will keep buying US Treasury debt
Media reports suggesting Beijing might slow down or halt its purchases of US bonds created a flurry of market activity, but in fact China has little choice in the matter
There is an old saying in finance that if you owe the bank US$100, you have a problem. But if you owe the bank US$1 million, then it is the bank that has the problem.
Well, the US government owes China US$1.2 trillion (and probably a lot more). Even adjusting for inflation, that means it is China that has the problem, not the US.
It seems financial markets forgot this saying this week. A report on the Bloomberg news service that Beijing is looking to scale back, or even halt, its purchases of US Treasury debt triggered a flurry of additional unease in markets that were already feeling jittery.
In response US Treasury debt sold off, pushing the yield on 10-year bonds to a 10-month high and prompting some watchers to declare the end of the long 35-year bull market in bonds.
Now to be fair, there are some good reasons why Chinese officials might want to trim their purchases of US government debt. There are signs that inflationary forces are emerging in the US economy, which will tend to push US Treasury yields up, and bond prices down.