Courtesy: Business Insider
Introduction
In the midst of soaring US Treasury yields, questions have arisen about whether China’s actions are contributing to this market upheaval. To shed light on this mystery, we turn to insights from Brad Setser, a former Treasury official.
The Bond Market Dilemma
The recent surge in US Treasury yields, the highest in 16 years, has left economists searching for explanations in one of the most significant market crashes in history. Central bankers have suggested the necessity of further rate hikes to curb inflation, and robust economic data, including a strong jobs report, has only added to the bond market’s turmoil.
China’s Role
Apollo Global Management’s Torsten Sløk drew attention to China, citing official US data indicating a $300 billion sale of Treasurys since 2021. However, Setser argues that this data doesn’t paint the whole picture.
Incomplete Data
Setser highlights that official US Treasury International Capital data only reflects foreign holdings held in US custodians. An adjustment for offshore custodians, such as Belgium’s Euroclear, reveals China’s US bond holdings as more stable, estimated between $1.8 and $1.9 trillion.
Hidden Holdings
Beyond this, the US data fails to account for US asset holdings managed by third parties. China’s State Administration of Foreign Exchange has accounts with global bond, hedge funds, and private-equity firms, further complicating the assessment.
Shift to Agency Bonds
While it may seem like China is reducing its Treasury holdings, Setser notes that the reductions have been smaller than other data suggests. In contrast, China has been increasing its holdings of US debt in the form of agency bonds. These bonds, issued by government-sponsored enterprises like Fannie Mae and Freddie Mac, have regained China’s interest due to rising yields.
The Bottom Line
In summary, Setser emphasizes that the most noteworthy change in China’s reserves over the past six years has been the shift toward agency bonds. While this has led to a minor reduction in China’s Treasury holdings, it does not equate to a decrease in the overall share of China’s reserves invested in US bonds or the US dollar. Understanding China’s bond asset strategy is crucial to demystifying its impact on the global market.