China and US Treasuries

As the US piles up its deficit spending, another factor enters the interest rates equation. To fund its spending, the US grows ever more reliant on the purchase of its securities by foreign governments. One of its biggest purchasers is China. Now the US is facing problems on that front.

In the first place, China is finding it needs more of its reserves for its domestic use. In addition it faces a declining return on any investment as rates decline. This is partially compensated by the rise in the US Dollar. In my view, should the US Dollar start a strong decline, China will revise its policy of purchasing US treasuries. And why not? It’s facing the double whammy of a low interest rate return and a declining US Dollar. I can’t see that as an attractive proposition.

The net effect of this is another pressure on the FED to raise rates or to create even more money thus increasing inflationary pressures.

I find it notable that despite the largest rise in the unemployment’s rate of change since 1975, the 30-year bonds have managed only a 1.5 rally at the time of writing. Of course, we may see a much better gain by day’s end. To obtain some perspective on the rally, it’s useful to note that the decline ranges have been around 3 points.

Is the bond market warning us of a possible rise in rates in the near future?

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