There's been more than a little attention devoted to this
question lately. The concern follows reports that China has been
selling portions of its massive US Treasury holdings to support a destabilized Yuan.
Marketwatch had a nice piece this
morning that should dispel much of investors' concerns. This chart from Marketwatch shows net flows of foreign private and official sector
purchases of Treasuries. Despite recent selling pressure, private sector purchases appear to be more than offsetting the
selling of foreign governments.
Here are some other
factors to consider that should equally support US Treasury prices, if not exert downward
pressure on bond yields. First, as reported
elsewhere, China cannot dump its holdings of UST for fear of price instability
and also the question of where to go to reinvest some $1.2 trillion of
proceeds. Second, if the world is really trending towards deflation, as is
being reported, US Treasury bonds will climb in value. As inflation erodes
the value of fixed income securities, deflation produces just the
opposite effect. Third, lower US budget deficits (for however long
that lasts) will decrease UST new issuance. Fourth, US pension funds
are increasingly talking about "de-risking" their investment
portfolios, by selling equities and corporate bonds to move into US Treasuries
and other safer investments.
Given these considerations, don't be surprised if near-term the 10-year heads back towards its January 2015 low of 1.68%, particularly if there's a flight to safety trade following a stock decline.
Given these considerations, don't be surprised if near-term the 10-year heads back towards its January 2015 low of 1.68%, particularly if there's a flight to safety trade following a stock decline.
