The US Treasury Secretary Steven Mnuchin has played down fears that China could sell off its holdings of US debt, amid rising tensions over trade between the two economic superpowers.
China is currently the largest holder of US debt, holding approximately $1.2 trillion of US Treasuries, and could sell off the debt as a retaliatory measure.
Lots Of Buyers For US Debt
When asked about this potential scenario, Mnuchin told CNBC on Friday, “I’m not concerned about that, There are lots of buyers around the world for US debt.” His confidence is in part due to the fact that US bonds are still generally regarded as safe assets, and demand is still high.
China has stockpiled US bonds over recent years and made billions out of interest payments. It holds around 2 per cent of the US debt that is owned by foreign countries.
If China did decide to sell its US Treasuries, the effects could bring chaos to global markets and hit the US economy hard.
Impact Of Supply Glut
Any mass sell-off would flood markets with an increased supply of US bonds, leading to falls in fixed income prices and rises in yields. This, in turn, would increase borrowing rates for both US companies and consumers.
The cost of issuing debt for the US Government would also go up, while the value of the $15 trillion of Treasurys already held would plummet.
Fears of a trade war between China and the US have spooked Wall Street with the Dow Jones industrial average, S&P 500 and Nasdaq composite all falling, and equities also down sharply.
Mnuchin sought to offer reassurance, describing the sell-off as ‘reasonable’ rather than a sign of panic, and pointing out that markets were still performing way above what they were 18 months ago.
“The markets have still been up a ton since the election.If you look at where the markets are, people still have very, very big gains.”
“People who are going to invest in the market should be focused on where it’s going to be in the long run. The prospects for the US economy are very strong.“