U.S. Treasuries are the world's largest bond market and one of the safest assets in the world. Recently, however, there has been an unprecedented sell-off in US Treasuries, which has led to a surge in US Treasury yields, a depreciation of the US dollar, and a threat to US economic and financial stability. Surprisingly, the main sellers of US bonds are the world's top three overseas buyers: Japan, China, and the United Kingdom.
In the past month, these three countries have accumulated a total of $89 billion in U.S. debt, of which China has the largest amount, bringing China's U.S. debt holdings down to $778.1 billion, a new low in nearly a decade. Why did these three countries sell US bonds at the same time?What is their motive and purpose for selling?What is the impact of their sell-off on the U.S. and the global economy?
Japan, China, and the United Kingdom sell U.S. bonds for different reasons and purposes, but they all have to do with the economic and political situation in the United States. The main reason for Japan's sell-off of U.S. bonds is to adjust the structure of its foreign exchange reserves and improve the yield and diversification of its assets. Japan is the world's largest foreign exchange reserve, with nearly 70% of its foreign exchange reserves in U.S. debt.
As yields on U.S. Treasuries have been low for a long time, so have yields on Japan's foreign exchange reserves. Therefore, Japan chose to appropriately ** US bonds when US bond yields rose, and instead bought bonds from other countries, such as Australia and Canada, to improve the yield and diversification of its foreign exchange reserves.
The main reason for China's sell-off of U.S. bonds is to protect its economic and financial security in response to the U.S.'s technological warfare. Since 2020, the United States has been carrying out various forms of suppression and sanctions against China in an attempt to contain China's development and rise. The U.S. has also threatened to cancel China's holdings of U.S. debt or use the U.S. dollar as a tool to cut off China's financial channels.
In order to guard against U.S. risks, China chose to gradually increase U.S. bonds when U.S. bonds were high, reduce its dependence on U.S. bonds, and increase investment in other assets, such as the euro, to protect its economic and financial security. The main reason for the UK's sell-off of US bonds is to respond to the post-Brexit economic and financial pressures and improve the liquidity and flexibility of its assets.
The UK officially left the European Union at the end of 2020 and entered a new era of uncertainty and challenges. The UK needs to face competition and sanctions from the European Union, as well as US interests and interference. To cope with these pressures, the UK needs to increase the liquidity and flexibility of its assets so that it can adjust and respond quickly in times of crisis.
Therefore, the UK chose to increase its cash and other highly liquid assets, such as the Japanese yen and the Swiss franc, to improve the liquidity and flexibility of its assets.
The impact and consequences of the sell-off of U.S. bonds in Japan, China, and the United Kingdom are mainly reflected in two aspects of the U.S. and global economies: the U.S. bond market and the U.S. dollar exchange rate. Japan, China, and the United Kingdom have sold off U.S. bonds, resulting in an increase in the supply of U.S. bonds and a decrease in demand, which has pushed up the yield of U.S. bonds and lowered the value of U.S. bonds.
The rise in U.S. Treasury yields will increase the cost of borrowing in the U.S., increasing the U.S. fiscal deficit and debt burden. The U.S.** has rolled out trillions of dollars in fiscal stimulus in response to the pandemic and recession, resulting in record levels of fiscal deficits and debt. If Treasury yields continue to rise, the US** will face more fiscal pressure.
Spending cuts or tax increases may have to be compelled to affect the economic recovery and social stability of the United States. On the other hand, the rise in US Treasury yields will affect US monetary policy and financial markets. In response to the new crown epidemic and economic recession, the central bank of the United States has implemented ultra-low interest rates and large-scale quantitative easing, which has led to a significant increase in the amount of money in the United States, and bubbles and risks have appeared in financial markets.
If Treasury yields continue to rise, the US central bank will face an even greater monetary policy dilemma and may have to tighten monetary policy, triggering turmoil and crisis in financial markets.
Japan, China, and the United Kingdom sold off U.S. bonds, which led to an increase in the supply of dollars and a decrease in demand, which pushed down the exchange rate of the dollar and reduced the value of the dollar. The decline in the U.S. dollar exchange rate will improve the U.S. export competitiveness, increase U.S. income, and be conducive to U.S. economic growth and job creation.
The decline in the U.S. dollar exchange rate will also reduce the cost of imports in the United States, reduce inflationary pressure in the United States, and be conducive to price stability and consumer welfare in the United States. The decline in the US dollar exchange rate will weaken the status of the US dollar as an international reserve currency and settlement currency, and affect the international influence and credibility of the United States. A decline in the exchange rate of the US dollar will also harm the interests of the holders of US dollar assets.
The decline in the exchange rate of the US dollar will also increase the repayment pressure of US dollar debt, putting countries and institutions borrowing US dollars at risk. The decline in the US dollar exchange rate will also trigger global capital flows and adjustments, causing some emerging market countries and regions to suffer from capital outflows and exchange rate fluctuations.
After China sold 89 billion U.S. bonds, the biggest "receivers" appeared, they are Ireland, Luxembourg, and Brazil. The reasons and purposes for these countries and institutions to take over US bonds are different, but they are all related to the economic and political situation in the United States. The impact and consequences of their takeover of U.S. bonds are also different, but they all have a certain impact on the U.S. bond market and the U.S. dollar exchange rate.
Holders of U.S. bonds, whether selling or taking over, should make reasonable and prudent decisions based on their own interests and goals. Issuers of U.S. bonds should also make effective and sustainable policies according to their own responsibilities and responsibilities. The fate of the U.S. debt is not only related to the interests and relations of the United States, but also to global peace and prosperity.