Bond Market Investors Scared Over Potential Global Selling Sprees
Banks have been the biggest buyers of bonds for over decade now which have sent interest rates spiraling downwards and stock markets soaring. However there is an ongoing fear from investors that some of the richest nations in the world will begin to scale back in the bond buying frenzy which helped boost the economies in nations most affected by the global financial crisis.
If investors’ fears were to materialize, the falloff in bond prices would have a devastating impact on equity markets that are currently trading at record highs. This would cause a domino effect in many countries which could then see inflation rates start to rise slowly but surely. With the inflation rate growing, workers would then call for higher work wages in a vicious circle that is a bond investor’s worst nightmare.
There are signs that this could be happening as many investors have already begun to sell out their bonds causing the yield to rise and bond prices to fall. Last week, the benchmark 10-year U.S. treasury bill went up to a high of 2.59 percent from 2.3 percent in 2017 and ended the week at 2.55 percent.
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Another indication of possible bond market problems is that China’s central bank reported that they may slow down or even stop buying of U.S. debt. China currently owns $1.2 trillion in U.S. Treasury bonds and has total reserves amounting to just over $3 trillion.
However, Chinese government itself has made no official decision over their shares in the U.S. Treasury as of this writing. Many experts believe that it is highly unlikely that Chinese president Xi Jinping will so quickly unload the assets that has put his country into the elite club of wealth nations.
In a statement, Brad Setser, who works at the Council on Foreign Relations as an expert in global capital flows said
The boring explanation here is that China just has enough Treasurys in its portfolio. It is possible too that China wants to signal to its people that it will not keep financing the U.S. when the U.S. is not treating China with respect
There are also financial experts out there who believe that there could be other motives for such a conservative move by the Chinese. The most likely motive is that this is China’s response to the tax cuts signed into law by U.S. president Donald Trump. Experts say that it is a good move for China to hold back to see the reaction of the U.S. government and banks in hopes to see policies normalize from a hard edge.
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