By Hilary Schmidt, International Banker
With the United States’ escalating trade war severely roiling bond markets—and with China having been a significant net seller of US government bonds in recent years—accusations have abounded that the Asian superpower has been recently dumping vast quantities of Treasury securities in retaliation for the US’ aggressive trade measures. But with the trade hostilities of recent weeks raising fears for the American economic outlook over the coming months, many see a pronounced weakening of global investor confidence in US markets as being chiefly responsible for the bond volatility.
As part of his wide-ranging “reciprocal” tariff agenda on virtually all US trading partners, it was reported on April 10 that US President Donald Trump had increased tariffs on Chinese goods from 54 percent to 145 percent. The move duly prompted China to hike its own import tariffs to 125 percent, with Beijing accompanying the move with a fair amount of derision levelled at its trade adversary. “Even if the US continues to impose higher tariffs, it will no longer make economic sense and will become a joke in the history of [the] world economy,” China’s Ministry of Finance stated in response. “With tariff rates at the current level, there is no longer a market for US goods imported into China…. If the US government continues to increase tariffs on China, Beijing will ignore [them].”
The trade war has also spooked global markets, with few asset classes reacting more violently than US Treasury securities—long-term yields jumped by the highest amount in at least five years. Indeed, despite debt markets experiencing solid gains throughout much of March amid a tariff-fuelled investor flight to safety from riskier equities to government bonds, Trump’s tariff announcements early the following month spurred a massive debt sell-off that saw yields on the US 10-year Treasury note spike by a mighty 0.5 percent to around 4.5 percent during the week to April 11.
Speculation has persisted that China did not, in fact, “ignore” the Trump tariffs but instead dumped substantial quantities of its US debt holdings. “China may be selling Treasuries in retaliation,” wrote Ataru Okumura, a senior interest-rate strategist at SMBC Nikko Securities in Tokyo, in a note to clients, as reported by Bloomberg on April 11. If so, China has an incentive to show “it won’t hesitate to cause turmoil in the global financial market in order to improve its negotiating power against the US”.
Yields also markedly rose overnight after US markets closed, when overseas markets were active. “These overnight spikes are more than just market noise. They may be the clearest signal yet that China is quietly—but deliberately—selling US Treasuries,” Joel Shulman, the founder, managing director and CIO of EntrepreneurShares, observed in an April 9 article for Forbes. “And the implications could be significant for the US economy and financial markets.”
When reviewing China’s recent actions regarding its net US bondholdings—a period that has seen the country sell substantially more US Treasuries than it has bought—one might be inclined to suggest that Beijing could be behind this latest bond-market rout. During December, for instance, official US government figures showed that Mainland China, along with the two other leading national holders of US Treasury securities (Japan and the United Kingdom), dumped more than $80 billion of US government debt in total. Japan, the biggest holder, shed some $25.6 billion of US Treasuries during December to leave its total holdings at the time at $1.0615 trillion, while $9.6 billion and a hefty $44.1 billion were sold by China and the UK, respectively, to leave their holdings at $759.0 billion and $722.7 billion.
Although evidence through February of this year showed that the three nations had somewhat replenished their US Treasury security holdings since December, the bond market’s pronounced volatility in early April has generated its fair share of allegations against China that it is engaging in large-scale bond dumping once more.
That said, many analysts have taken the opposite position—that China has not been bulk selling—by pointing to evidence of moves of varying degrees in yields at different maturities along the US Treasury securities’ curve. Bloomberg data shows that while yields on 5-year US notes gained 36 basis points in the week to April 11—the most for this maturity since March 2022—yields on 30-year notes climbed by 48 basis points. “If China was selling, then front-end yields should be higher, but they are not, and hence we doubt it’s China selling,” according to veteran bond analyst Prashant Newnaha. “This selloff in Treasuries is primarily at the long end of the curve, and speaks to broader investor re-allocation,” the TD Securities strategist told Bloomberg on April 11.
United States Secretary of the Treasury Scott Bessent has also downplayed suggestions that China is weaponizing its Treasury holdings to inflict damage on its American economic rival. “If Treasuries hit a certain level or if the Federal Reserve believed that a foreign—I won’t call them an adversary—but a foreign rival were weaponizing the US government bond market or attempting to destabilize it for political gain, I am sure that we would do something in conjunction with each other, but we just haven’t seen that. We have a big tool kit,” Bessent told Yahoo Finance on April 15, adding that it is not in China’s best economic interests to sell. “If they sell Treasuries, then they would have to buy RMBs, and it would strengthen their currency. And they’ve been doing just the opposite.”
Christopher Wood, global head of equity strategy at Jefferies LLC, meanwhile, contended that instead of Chinese selling being the source, bond yields were surging due to the closing of a popular arbitrage trade between cash Treasuries and futures. “The other more plausible explanation is forced selling triggered by highly leveraged players in the ‘basis’ trade where absolute-return investors seek to make money,” Wood posited to Bloomberg. “Such arbitrage strategies have accounted for a growing share of foreign ownership of Treasury bonds.”
Others have proposed that the observed volatile yield moves and sharp tightening of swap spreads resulted from massive bouts of selling of liquid assets, such as US government bonds, as investors, including hedge funds, sought to meet margin calls after the tariff announcements inflicted hefty losses on their portfolios across asset classes. “When the prime broker starts tightening the screws in terms of asking for more margins or saying that I can’t lend you more money, then these guys obviously will have to sell,” Mukesh Dave, chief investment officer at Aravali Asset Management, a global arbitrage fund based in Singapore, told Reuters on April 9.
Many also simply view the roiling of bond markets as growing evidence of diminished investor confidence in the United States. “The market has lost faith in US assets,” Deutsche Bank analysts wrote in a research note shortly before Trump’s announcement. With China’s central bank having stepped up its purchases of gold in recent years, during which time the country turned into a net seller of US Treasuries, moreover, the historically high confidence in US assets such as bonds and the dollar as safe-haven investments appears to be firmly on the slide. The switch-over to gold is “a potential concern I’m hearing discussed more often in the last couple months,” Phillip Wool, chief research officer and portfolio manager at Rayliant Global Advisors, recently told Barron’s. “I think that’s going to be more of a long-term trend, and [it] depends on whether the US continues exploiting the dollar’s reserve status as a geopolitical tool.”
But while there is perhaps insufficient evidence to point to China as being responsible for the recent bond-market selloff, some fear that its still-substantial holdings of US Treasury securities could be sold in vast quantities in the future to push back against the US’ continued trade aggression. “Markets are now concerned that China and other countries could ‘dump’ US Treasuries as a retaliation tool,” Grace Tam, chief investment adviser at BNP Paribas Wealth Management in Hong Kong, told Reuters.
Can such a scenario be avoided? An easing of trade tensions between the world’s two economic heavyweights would certainly be helpful. US media outlets have been citing unnamed sources close to Trump to report that US officials have been pressing China to initiate a call between President Xi Jinping and his American counterpart, but with no success so far. Trump himself has also refused to confirm whether he has spoken to Xi Jinping yet.