The US Treasury Secretary, Steven Mnuchin, has downplayed concerns about the possibility of China selling its $1.2 trillion holdings of US Treasuries in response to increasing trade tensions between the two nations.
Mnuchin has expressed confidence that there are many buyers for US debt around the world, and that US bonds are still considered safe assets with high demand.
China’s Holdings and Potential Impact
China currently holds around 2% of the US debt owned by foreign countries and has profited billions from interest payments on US bonds over the years. However, if China were to sell its US Treasuries, it could cause chaos in global markets and severely impact the US economy.
The mass sell-off would result in an oversupply of US bonds, leading to a decrease in fixed income prices and an increase in yields. This would affect both US companies and consumers by increasing borrowing rates, and the cost of issuing debt for the US government would also rise. Additionally, the value of the $15 trillion of Treasuries already held would decrease.
Market Reaction and Mnuchin’s Reassurances
The possibility of a trade war between China and the US has caused concern on Wall Street, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all falling, leading to sharp declines in equities. Mnuchin has attempted to provide reassurance, describing the potential sell-off as “reasonable” rather than a sign of panic. He also pointed out that markets have performed significantly better over the past 18 months.
Mnuchin advised investors to focus on the long-term prospects of the market rather than short-term fluctuations.