China is Again Buying Long-Term U.S. Treasuries . . . Does That Mean China is Betting on Deflation? → Washingtons Blog
China is Again Buying Long-Term U.S. Treasuries . . . Does That Mean China is Betting on Deflation? - Washingtons Blog

Monday, August 17, 2009

China is Again Buying Long-Term U.S. Treasuries . . . Does That Mean China is Betting on Deflation?

For the first time since the financial crisis started, China is again ramping up purchases of long-term U.S. treasury bonds. Indeed, according to Bloomberg:

China’s holdings of notes and bonds climbed $26.6 billion in June to $617.7 billion, a 4.5 percent increase, while bill holdings fell 25 percent to $158.7 billion, the Treasury’s data showed.

The difference between treasury bills, notes and bonds are the length until maturity:

  • Bills are issued for terms less than a year
  • Notes are issued in terms of 2, 3, 5, and 10 years
  • Bonds are issued in terms of 30 years

Bloomberg also noted:

When the U.S. raised $75 billion last week, a group that includes international investors purchased a record amount of 3- year notes, the biggest share of 10-year notes since 2005 and almost half of the 30-year bonds sold, according to Treasury data.

Some smart people are arguing that this means that China's head economists believe that deflation will prevail over fears of inflation.


Well, on August 14th, Bloomberg quoted the following people talking about a bond rally being tied into lowered inflation expectations:

“The relief over the inflation situation and the slippage in consumer confidence very readily justify the move upwards in the Treasury market,” said Eric Lascelles, chief economist and rates strategist at TD Securities Inc. in Toronto, a unit of Canada’s second-biggest bank. “The economic story is more consistent. The inflation data is bond-bullish.” ...

“Inflation will stay tame to surprise-to-the-downside for the rest of the year,” said Alex Li, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of the 18 primary dealers that trade with the Fed. “It’s going to be good for the 5- to 7-year sector and longer.”

Treasuries surged yesterday as a report showing an unexpected drop in retail sales suggested inflation remains restrained, helping to spur higher-than-forecast demand at a record $15 billion auction of 30-year bonds.

“The economic recovery will be slow at best, which is more bullish for bonds,” said David Ader, head of U.S. government bond strategy in Stamford, Connecticut at CRT Capital Group LLC.

The argument by some China watchers is that China is following the same trend.


  1. Of course China is buying US debt. They have to support the US with low interest rates. Half their bloody economy depends on Americans buying their cheap bullshit products.

    If they sold their holdings, interest rates would shoot up and the value of their holdings will plummet fast. They are doubling down and hoping for a recovery in the US.

    If you think for a moment the Chinese are buying US debt because of deflation fears that is misguided. Deflation will make sure the US cannot pay the interest on the debt and a default will ensue. Deflation will crush the US economy and tax revenues will drop off the cliff to zero. China is simply bailing us out and we should thank them for that =)

  2. That introduction to the deflation vs inflation debate is a waste of my time. You basically have the billionaire investors saying we'll have inflation and no named academia with net worth's below $1 million dollars crying for deflation.

    If we have deflation, you are saying all the money that is being printed becomes more valuable. All the people who are receiving social security pay checks will have their buying powers increase several fold since all asset prices will continue to decline. The whole premise of the deflation theory is because credit is contracting, that demand is being reduced. Part of that is true! But remember, people don't buy food, water and refuel their gas tanks on credit! They purchase luxury cars, jewelry, over priced gadgets.

    What's happening is that people are trading down what they buy. They'll buy that smaller LCD TV, or a used car instead of a new car. Demand for food, water, utilites, energy will continue to grow since the 2.5 billion + from China & India did not disappear during the credit meltdown.

    If our currency was backed by something such as gold, then deflation may be possible. But the reason our gov't moved away from the gold standard was to have the ability to weaken the currency to benefit the economy by being able to control employment much better than under the gold standard.

    I enjoy your view on politics, but please don't touch base on economics.


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