What’s Going On Here?

The US reported that China’s April holdings of American government bonds were at their lowest level in two years. Investors pondered whether the decline was in retaliation to ongoing trade tariffs.

What Does This Mean?

• China owns almost 1/3 of all US debt held outside America. (China likes Uncle Sam’s bonds: they’re low-risk since the US can always print more money to pay its debt.)
• Its April selling of US bonds might have put downward pressure on their prices and upward pressure on their yields

Prices and yiels are move inversely.

• Because the interest rates of new government bonds are partially based on yields of current ones, it could potentially become more expensive for the US to borrow money.
• But that might not be the entire picture: China has investment accounts all over the world, including in Belgium, where US government bond purchases have been rising, potentially compensating for China’s decline in direct buying. So analysts believe China’s bond holdings may not have changed by as much they seem.

Why Should I Care?

For markets: It’s your move, USA.

The US Federal Reserve will announce its interest rate decision this week. While most investors expect no change until later in the year, lowering rates would likely attract buyers for existing government bonds.

The bigger picture: The European Central Bank relieves pressure.

• Europe‘s central bank said it was willing to lower interest rates or buy up eurozone government bonds in order to help stimulate the region’s failing economy.
  • A weaker resultant euro would make the region’s exports cheaper and more attractive to foreign buyers – helping export-reliant Germany and Italy.
  • Lower borrowing costs should encourage further spending, boosting company earnings.

Content source: Finimize. (2019) Cloak And Dagger. Available from: https://www.finimize.com/wp/news/gleucloak-and-dagger/ [Accessed 22 June 2019]