USA-China Trade War

With the ignition of a full on trade war between the USA and China, some attention is being paid to the 1.2 trillion dollars in U.S. Treasury Bonds held by China.

If China sells a significant portion of them, it will drive down Treasury prices. A Treasury yields its face amount at maturity. The redemption value is unaffected by the price paid for them. So this means that the lower price at which a Treasury is bought, the higher the return. Driving Treasury prices down effectively increases interest rates because the difference between the price paid and the face value is the interest earned. Big sales of Treasuries by China would drive interest rates skyward.

Just as a lower bond price means higher interest rates, so higher interest rates mean a lower bond price. If interest rates have climbed, you need to be able to pay less for a bond to earn that higher interest. This means that if China sold Treasuries, this would tend to depreciate the value of their remaining holdings. Plus it would give China less leverage with Washington. Right now, China’s holdings of Treasury Bonds is an important card in its hand.