Cloak And Dagger | FinBites
What's going on?
On Tuesday 18 June, 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.
Image source: AlyaDC, Phongkrit, Rita Petcu, Ollyy, charnsitr - Shutterstock
What does this mean?
China owns almost a third of all US debt held outside America. (The country 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 (as the two move inversely). And 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 going forward.
But that might not be the entire picture: China has investment accounts all over the world, including in Belgium. US government bond purchases have been rising there, 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 on Wednesday. While most investors expect no change until later in the year, lowering rates would likely attract buyers for existing government bonds (though several investors haven’t needed further encouragement). Lower rates should prompt investors to buy up current US bonds, since any new ones would probably offer lower interest payments.
The bigger picture: The European Central Bank relieves pressure.
On Tuesday, 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 flailing economy. A weaker resultant euro would make the region’s exports cheaper and more attractive to foreign buyers – helping export-reliant Germany and Italy. And lower borrowing costs should encourage further spending, boosting company earnings. The possibility appeared to be cheered by investors who bought up European stocks.
Credits: Finimize. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products.