By Jeff Harding
To follow up on yesterday’s article on China’s dilemma—the $1.5 trillion is US debt they hold—it seems that this week’s Treasury auctions ran into trouble:
Shaky auctions of Treasury notes this week reignited concerns about whether the government can attract buyers from China and elsewhere to soak up trillions in new debt.
A fuse was lit this week when traders noted China’s apparent absence from direct participation in two Treasury bond auctions. While China may have bought Treasurys just before the auctions, market participants read the country’s actions as a worrying sign that China and other foreign investors may be ratcheting back purchases at a time when the U.S. is seeking to fund a $1.8 trillion budget deficit.
This week alone, the U.S. deluged the bond market with more than $200 billion in record-size sales. The U.S. has had little trouble finding buyers in recent months. But that demand is fading, and the Treasury market has become volatile. Many are selling in favor of riskier assets such as corporate bonds, stocks or even higher-yielding debt of other countries. This portends higher interest rates for the Treasury, and it may need to find alternative sources of cash like issuing more inflation protected Treasury bonds.
Tension on Wall Street trading desks began building late last week when the Treasury surprised the market with plans for a record week of sales. A Monday sale of $90 billion in Treasury bills with maturities of as much as a year went well. But China appeared absent from the following two sales, which totaled $81 billion of debt, traders say.
By Thursday morning, trading-desk heads were frantically working with clients to ensure a better fate for the $28 billion seven-year note auction. It did fare far better, allaying some concerns. …
The Chinese are also in a bind. If they sow doubts about the solvency of the U.S. government, they risk driving down the value of the $800 billion in U.S. Treasurys they already own.
I think China is sending us a not so subtle message: do something about your reckless spending, the deficit, and control inflation or you may have to find another market for your paper. This can’t be seen as a friendly gesture after the terse statements coming out of our economic summit with them about “cooperation” and “common goals.”
We just fed them palaver because we know they won’t jeopardize their dollar holdings. My guess: they will slowly and carefully divest themselves of US paper when they see inflation kicking up. It’s not possible for them to completely divest, but they will try to diversify. Euro? Australian or Canadian dollar? Gold? And watch out for rising interest rates as our huge deficit seeks financing.
