The “Nuclear Option” In Global Trade Wars: Dumping US Treasuries… But Will They?

Saturday, March 3, 2018
By Paul Martin

by Tyler Durden
ZeroHedge.com
Sat, 03/03/2018

In response to Trump’s shocking announcement of a global trade war (which may have been “born out of anger at other simmering issues and the result of a broken internal process”), the age-old question has once again returned front and center: will foreigners retaliate by selling US securities?

First a quick recap: there was $6.3 trillion in US Treasuries held by foreign nations as of Dec. 2017, of which over $4 trillion was held by official accounts: central banks, reserve managers, sovereign wealth funds, and others.

Also recall that much if not all of these official foreign Treasury holdings built up over the years as US trading partners converted dollars from persistent American trade surpluses into US debt.

Which is why, as Reuters’ Richard Leong writes, should China, Japan and other nations, which have recycled their trade dollars through their Treasuries holdings, suddenly decide to whittle them down, “markets could be in for a rough ride.”

Naturally, foreigners are well aware of the volatility-inducing leverage they have, and have previously threatened to sell US Treauries in response to adverse US policies: in April 2016, it was the Saudi Arabia who Threatened to liquidate its Treasury holdings if Congress probed the country’s role in the Sept 11 attacks (Congress did, found the Saudis responsible, yet neither has Saudi Arabia “liquidated” its holdings, nor has the nation been found guilty of terrorism in any court of law, in any jurisdiction). Then in early January, Bloomberg reported that Chinese officials would recommend “slowing or halting”, or evening selling, US Treasuries (China subsequently denied the report as “fake news”).

Nonetheless, “the threats are real,” said Kristina Hooper, Invesco’s chief global market strategist. “We need more foreign demand, not less.” She is right: a foreign retaliatory move in the wake of Trump’s first big protectionist action, would come at a time when foreign demand for U.S. debt is seen critical to offset an expected surge in federal borrowing needs.

To be sure, it is unlikely that Beijing, Tokyo and other overseas central banks would dump Treasuries altogether, if at all: after all such a move would be tantamount to mutual assured destruction as the financial health of the entire world is closely tied to not only the viability of the dollar, but the stability of US rates. While China may be tempted to “teach America a lesson” by selling some of its TSY holdings, the recession that would result would lead to a plunge in US demand for Chinese exports, far worse than any trade war Trump can unleash. As a result, countries could also wind up torching their own U.S. bond investments, without winning any guaranteed gains from Washington, analysts told Reuters.

“They already own a lot of them. They would be shooting themselves in the foot,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management in Philadelphia.

The Rest…HERE

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