President Xi Jinping would have to be mighty angry to dump treasuries in droves, because a sell off would have a negative impact on its own financial affairs. “It’s like holding a gun to your own head and saying I have a hostage,” says Reinhart.
If China were to sell its bond holdings, it would likely have to sell it at least some of the treasuries it purchased at a loss. If other countries sold, too, and prices plummet then it could lose billions. “It will inflict capital losses on itself,” says Reinhart.
The U.S. dollar would also fall, which would then make this trade-related provocation somewhat moot, adds Mark Zandi, chief economist at Moody’s Analytics. A lower greenback would make U.S. exports more attractive, which would then hurt China’s own export market. “It would negate some of the impact,” he says. “Rates might spike, but the dollar would fall and what’s the net impact of that? It doesn’t feel like it’s a winning strategy.”
As well, it’s not certain that selling treasuries would have much of an impact, says Mills. If other countries step into buy those treasuries, then interest rates could remain stable.
As of right now, U.S. bonds are still seen as a safe asset that people and countries buy when the global economy goes awry. If that stays the case then there’s no reason why demand wouldn’t materialize.
“It’s not like demand for U.S. Treasurys has broadly fallen,” said Mills. “I would think that if they did start to sell, there would be a fair bit of demand from other countries and U.S. companies, especially as rates slowly increase, which makes them more attractive holdings.”
China could take a more measured approach, said Reinhart, and not buy new bonds as old ones mature. With the United States also reducing its quantitative easing-related bond purchases, supply would then slowly rise and potentially push rates to more extreme levels.