Solutions Economic and Market Watch

Hello, and welcome to the Economic and Market Watch podcast for the week of April 28, 2025. This is Sam Kem of CFC.

Today, we're diving into an intriguing topic that has been making headlines recently. Speculations are swirling that China might be offloading U.S. Treasurys to exert pressure on the United States, leveraging its substantial holdings of U.S. debt.

You may have heard about the significant amount of U.S. debt held by China, and you may wonder, how concerned should we be?

Let's unpack this complex issue and explore its potential implications for the U.S., China, and the rest of the world.

First, let's cover the basics. U.S. Treasurys are debt securities issued by the US government to fund its spending. Treasury yields represent the borrowing cost for the government, and these securities are regarded as safe-haven investments that serve as benchmarks and collateral for other loans globally. Treasurys can be bought either when they are initially issued or later on in the secondary market.

When they are sold in the secondary market, it's merely a transfer of ownership from one holder to another rather than a collection of the debt itself. The debt can only be collected upon reaching the set maturity date of each Treasury.

So, when you hear about China dumping U.S. Treasurys, understand that it's not about debt collection. It's simply selling its holding of these financial instruments to other investors. The implication of this is, if the amount of Treasuries being sold is large enough, it could push Treasury yields higher. This change in yields can have a ripple effect, raising the interest rates on loans benchmarked to treasuries here in the U.S., impacting borrowers across the nation.

If you think this gives China so much power over the U.S., think again. When yields go up, bond prices go down. Hypothetically, if China sells a ten-year Treasury bond with a face value of a $100 it bought five years ago, when interest rates were lower, that bond cannot be sold at a $100 today. It has to be less than that to compensate for the fact that it pays a lower coupon rate, because potential buyers could buy a newly issued bond that pays a higher coupon rate.

In this case, China would make a loss by selling its existing U.S. bonds. Would China still do it? Of course, it could, but it must pay a price. In what I just described, both the U.S. and China would be negatively impacted.

Another aspect to consider is how much holdings of U.S. Treasurys would be enough to move the market.

The top three foreign countries that hold U.S. Treasurys are Japan, China, and the United Kingdom.

According to the U.S. Treasury Department, Japan holds about $1.1 trillion of U.S. Treasuries as of February 2025. China holds about $780 billion, and that's an increase from January, by the way. And another $750 billion is with the United Kingdom. Now, if these billion-dollar figures are eye popping, let's put that into context.

Each of these three countries holds less than 3% of all outstanding U.S. debt. About 74% of U.S. Treasurys are held domestically by the Federal Reserve, government agencies such as Social Security, U.S. pension funds, and other domestic investors. China alone, who holds just over 2% of U.S. Treasurys, cannot move the market without severely hurting itself.

There's also another rumor that Canada is orchestrating a collective sale of U.S. Treasurys alongside with Europe and Japan. This is not true. Not only have Canada's holding of Treasurys not decreased, they actually increased from $350 billion to over $400 billion. This likely reflects Canada's strategy to hedge against economic chaos driven by the current trade war.

The recent movement in Treasury use, which have been very volatile, has more to do with market reactions to economic uncertainty as well as the fears caused by the trade war. It is not about any country or group of countries coordinating Treasury sell offs.

Now, I'm not implying that the safe haven status of U.S. Treasuries will last forever, but that has more to do with us than anyone else.

That's it for today. Thank you for listening, and be sure to download the Economic and Market Watch intelligence brief and dashboard. Talk to you soon.