Warning Bell? China May Stop Buying US Debt

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by Peter Schiff, SchiffGold:

Ding.

They say bells never ring when markets hit the top. But maybe they do and people just don’t listen.

Yesterday, Bloomberg reported China may slow or even stop its purchase of US Treasuries. In other words, a major source of US government debt financing may be pulling out. This comes at the same time the Federal Reserve has committed to shrinking its balance sheet. 

“The Chinese are applying pressure to the Treasury market just as the (Federal Reserve) is about to step away from being the buyer of last resort,” FX strategy at BK Asset Management managing director Boris Schlossberg told Bloomberg.

So could this be a ringing bell?

In his latest podcast, Peter Schiff called it “an ominous sign.”

A. China is the largest buyer and owner of US Treasuries in the world. But B. we just cut taxes. We cut taxes and not spending, so we are financing these tax cuts by borrowing more money, by running bigger deficits, by selling more bonds. And if the largest buyer and owner of those bonds is saying, ‘No más,’ well then that is a big problem. Because who is going to step up and replace the Chinese?”

Peter made went on to make an interesting point – who would even want to buy US Treasuries at this point? Even if you aren’t an economic doom-and-gloomer, the current bond market and historic bond prices don’t make them particularly desirable assets.

Aren’t there other assets you would rather own than extremely low-yielding US Treasury bonds? So, if the Chinese don’t want to buy, it stands to reason a lot of other people don’t want to buy either. Especially if they know the Chinese are not buying.”

This raises another question. If the Chinese stop buying US Treasuries, will they start selling what they have? The fact that they don’t want to buy would seem to indicate they are bearish on US debt. It wouldn’t be unreasonable to think the next step might be to sell. Or China could follow the Fed’s strategy and simply let their bonds mature, decline to roll them over, and ask for their money back.

Where is the US Treasury going to get China’s money back if China’s not going to loan it to them again? If the Federal Reserve isn’t loaning it again? Where are they going to get the money? They can’t. That is the problem. You know, it’s amazing how few people are worried about a problem so potentially ominous as this one.”

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