Is China Dumping US Government Bonds?

You probably saw the headline this morning that China is retaliating against US tariffs with an 84% tariff of its own.

This trade war is obviously far from over… which probably means that financial markets are in for a lot more volatility.

Most people focus on the stock market. And that has obviously been a wild ride. But what’s happening in the bond market right now is actually a much bigger deal.

Remember that US government bonds have been considered a “safe haven” asset for decades. And that was the case, very briefly, late last week. Investors dumped stocks and then parked all that cash in the bond market.

As a result, demand for bonds surged, and yields plummeted to as low as 3.8%.

But that sentiment has very, very suddenly reversed. And in a matter of days, US government bond yields have spiked.

The 30-year Treasury yield, for example, is normally quite stable and moves very slowly. But its very sudden surge over the past three days has been its quickest increase in more than 40 years. The 10-year Treasury yield has also surged at its fastest clip since the 2008 financial crisis.

This sudden rise in Treasury yields– what’s supposed to be a very safe and boring asset class– is a very big deal.

For consumers, it almost certainly means higher interest rates; many consumer loans, including 30-year mortgages, are based on US government bond yields. So higher yields means that it will be more expensive to borrow.

And that’s especially true for the federal government. Remember, the Treasury Department has to refinance more than $8 trillion worth of US government bonds just between now and the end of the year.

Plus, on top of that $8 trillion, they’ll probably issue at least another $2 trillion in new debt just to finance the deficit.

So higher interest rates are an absolute killer and will cost the government hundreds of billions of dollars per year, just to pay interest on the national debt.

Why is this happening, i.e. why are yields increasing so quickly?

Well, about the only thing that can cause yields to rise so quickly is a major supply and demand imbalance, i.e. too many investors are selling their bonds, and not enough investors are willing to buy them.

And this could easily result from someone (or multiple parties) deliberately dumping their bonds and flooding the market.

Who might do such a thing?

Well, perhaps some of the big Wall Street firms– many of which have already expressed anger and dissatisfaction over the tariff policy. And some of them might simply not want to own US government bonds anymore.

Remember, it wasn’t that long ago (September 2022) that then-British Prime Minister Liz Truss unveiled her economic plan. It was a pro-business, pro-market plan that involved tax cuts and more.

But bond investors were concerned that Ms. Truss’s plan would result in a significant deficit. So they dumped their British government bonds (known as gilts). Bond yields skyrocketed, and the British pound went into freefall.

It’s possible the same ‘bond vigilante’ mentality might be at work here.

It’s also possible that some disgruntled foreign country could be divorcing themselves from the US dollar. Maybe it’s a supposed ally, like France. But it could just as easily be China (which owns more than $1 trillion of US Treasury securities).

If true, the havoc that China can wreak by dumping their Treasury bonds and causing an interest rate spike in the US will substantially exceed any economic damage from their 84% retaliatory tariff.

Perhaps it’s all of the above– multiple countries AND bond vigilantes together. Who knows. But if this trend continues and US government bond yields keep rising, that pressure could be enough to get the President to back down.

One thing’s for sure: gold is going higher. No surprise there; after an initial sell-off in which investors sold everything, gold has been surging back to its record highs.

Most likely this is because foreign governments and central banks have resumed their buying in an effort to distance themselves from the US dollar.

The interesting part about this is that gold companies are now also going higher.

We have been talking about this for months. And months. We said that gold is at an all-time high, yet gold miners and related businesses were dirt cheap. We also said that bizarre anomaly won’t last.

Well, it appears that investors have finally woken up to the new reality, and gold companies are now finally moving much higher.

No matter what happens from here, it’s becoming more and more clear that there will definitely be a major reset in the global financial system (and gold may be a part of that).

In fairness, it’s also worth pointing out that there may be a grand strategy here by the Trump administration. We’ll discuss this more soon but suffice it to say they’re obviously making a huge gamble with the future of the US economy.

Source

Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.

From Simon Black of SovereignMan.com

Source: https://www.schiffsovereign.com/trends/is-china-dumping-us-government-bonds-152455/