Treasuries have been under pressure in recent months, with the 10-year yield hitting 3% for the first time since late 2013 (see this week’s Bond Market Perspectives) due to a combination of factors including expectations of higher economic growth and inflation, as well as additional supply due to near-term deficits. The threat of China liquidating Treasuries as a potential bargaining chip in trade negotiations has also been on the mind of investors in recent months. Such a move could put further downward pressure on Treasury prices (and upward pressure on yields), though as we noted in a recent Bond Market Perspectives, we don’t believe such a move is probable given that it would also have the potential to impact China’s economy.
Each month the U.S. Treasury releases the Treasury International Capital System (TICS) report which shows foreign ownership of Treasuries. This month’s report showed foreign Treasury holdings for March, which was the month where trade tensions started to heat up as President Trump announced the potential for steel and aluminum tariffs (March 2, 2018), another $50 billion of tariffs on Chinese goods (March 22, 2018), and China also announced potential retaliatory tariffs of their own. Our LPL Chart of the Day shows that China did not sell Treasuries in March, as LPL Research Chief Investment Strategist John Lynch explains, “Trade concerns ratcheted up in March, but it is notable that China did not sell Treasuries as some had feared; rather, yesterday’s TICs data showed that China’s Treasury holdings increased by approximately $11 billion in March.” Trade talks continue, and it is still possible that additional measures could be taken by both sides, but so far talk of Chinese selling has been just that — talk.
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