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US Federal Reserve
OpinionComment
David Brown
David Brown

Macroscope | Chinese investors are backing off US assets as economic storm clouds gather

  • Investors are taking their cue from the US Federal Reserve as it tries to reduce its holdings of US government debt
  • However, there are no signs investors are rushing to the exits on US assets; they are merely adjusting risk preferences ahead of what is likely to be a difficult few months

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A trader watches US Federal Reserve chairman Jerome Powell on a screen at the New York Stock Exchange. International investors are following the Fed’s lead and selling off US government debt, suggesting ebbing investor confidence as the US Congress is at an impasse over the debt ceiling. Photo: Reuters
David Brown

It looks like China’s investors are giving US investments a wider berth as the outlook on US financial stability clouds over. It is not exactly a fire sale right now, but investor confidence is ebbing away with China reducing its holdings of US Treasury securities by 17 per cent in 2022 to US$867 billion, its lowest level since 2010.

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There is a lot at stake with international investors becoming more cautious about the US outlook, especially the deepening bear market for bonds, the rise in US interest rates and the strong US dollar’s fall. But there could be growing concern about rising credit risks given the sprawling size of the US government bond market, which is fast approaching its permitted US$31.4 trillion debt ceiling.
Unless the US Congress reaches a compromise soon, the US Treasury market risks defaulting by the summer and giving global financial markets a bloody nose in the process. It is something the world can ill-afford after all the shocks in recent years.
It is inconceivable that it could ever come to a US credit default, but the world has been close to the edge before. It could be a close-run thing trying to strike a deal in Congress, especially considering the 15 ballots it recently took to elect Kevin McCarthy as speaker of the US House of Representatives after fractious infighting within the Republican Party.

It doesn’t bode well for US President Joe Biden trying to reach a budget compromise in the next few months, potentially leaving the US Treasury market at dire risk. In the last year alone, 10-year US Treasury yields have more than doubled to 3.86 per cent.

The chances are the market could see yields breach pre-2008 levels above 5 per cent if the going gets rough. If gridlock deepens and investor confidence implodes, don’t rule out the possibility of double-digit US bond yields.

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