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I don't think I believe your last paragraph. It's certainly true that when predicted interest rates go up, existing bonds (which have fixed yields built into t

by gjm11 11y ago

I don't think I believe your last paragraph. It's certainly true that when predicted interest rates go up, existing bonds (which have fixed yields built into them) become less attractive and their prices go down. So it's certainly true that decreasing bond prices can be indicative of higher future interest rates. But if bond prices are decreasing only because the Chinese government is unwinding its position in Treasuries, surely that doesn't apply. Parallel example: Suppose I hold a vast quantity of exotic options that pay off in some rather specific circumstances -- e.g., Apple shares increasing by more than 10% during January 2025. And suppose I have carelessly mismanaged my financial affairs so that these are a large fraction of my assets, and now I need more money. So I start selling off these options. That will reduce their market price, but that doesn't (unlike most movements in the price of such options) indicate that anyone actually thinks Apple shares are now less likely to gain 10% in 2025-01. Perhaps there's some subtle way for these artificially decreasing bond prices to cause higher interest rates in the future? I'm not seeing it, but I'm not an expert in finance or economics...

URSpider94 11y ago
First of all, the reverse of this situation (buying up lots of Treasury notes) is the basis for the Fed's "Quantitative Easing" policy, which was in place for most of the past decade and is credited with holding down US interest rates. So, government economists clearly believe that the price of these notes has a downstream impact on interest rates. Second, the China sale is not "artificially" impacting bond prices, any more than I'm artificially impacting the price of avocados if I start buying all of them. As long as the price is a fair market price, then it's by definition not artificial, because everyone is participating by their own free will. Third, the reasoning for this impacting overall interest rates is that debt is a commodity. There is currently a balance in the market between investment in, for example, Treasury bonds and mortgage-backed securities that takes into account many factors such as yield, perceived risk, liquidity, etc. If Treasury notes suddenly become cheaper and offer a higher yield, then some money that would have gone into new mortgages will instead go into Treasuries. With the same number of borrowers competing for less money for home loans, the cost of that money (the interest rate) will go up. Again, the key point is that the impact on Treasury rates is not artificial, it's a real consequence of the sell-off of China's holdings. One last analogy -- if I dump millions of gallons of water "artificially" into a reservoir, the river that it feeds will flood for real. It would be pointless for the people downstream to argue that the flood is artificial.
lmm 11y ago
> Parallel example: Suppose I hold a vast quantity of exotic options that pay off in some rather specific circumstances -- e.g., Apple shares increasing by more than 10% during January 2025. And suppose I have carelessly mismanaged my financial affairs so that these are a large fraction of my assets, and now I need more money. So I start selling off these options. That will reduce their market price, but that doesn't (unlike most movements in the price of such options) indicate that anyone actually thinks Apple shares are now less likely to gain 10% in 2025-01. People do, almost by definition - the price is how you express an opinion. At the very least, you've shown yourself to be incompetent, which reduces everyone else's faith in your judgement. The Chinese government isn't unwinding its position in Treasuries for fun; they're doing it because they think dollars are going to be less valuable in the future, i.e. that China will be importing less and/or exporting more than they had previously thought.

by gjm11 11y ago

URSpider94 11y ago

First of all, the reverse of this situation (buying up lots of Treasury notes) is the basis for the Fed's "Quantitative Easing" policy, which was in place for most of the past decade and is credited with holding down US interest rates. So, government economists clearly believe that the price of these notes has a downstream impact on interest rates. Second, the China sale is not "artificially" impacting bond prices, any more than I'm artificially impacting the price of avocados if I start buying all of them. As long as the price is a fair market price, then it's by definition not artificial, because everyone is participating by their own free will. Third, the reasoning for this impacting overall interest rates is that debt is a commodity. There is currently a balance in the market between investment in, for example, Treasury bonds and mortgage-backed securities that takes into account many factors such as yield, perceived risk, liquidity, etc. If Treasury notes suddenly become cheaper and offer a higher yield, then some money that would have gone into new mortgages will instead go into Treasuries. With the same number of borrowers competing for less money for home loans, the cost of that money (the interest rate) will go up. Again, the key point is that the impact on Treasury rates is not artificial, it's a real consequence of the sell-off of China's holdings. One last analogy -- if I dump millions of gallons of water "artificially" into a reservoir, the river that it feeds will flood for real. It would be pointless for the people downstream to argue that the flood is artificial.

lmm 11y ago

> Parallel example: Suppose I hold a vast quantity of exotic options that pay off in some rather specific circumstances -- e.g., Apple shares increasing by more than 10% during January 2025. And suppose I have carelessly mismanaged my financial affairs so that these are a large fraction of my assets, and now I need more money. So I start selling off these options. That will reduce their market price, but that doesn't (unlike most movements in the price of such options) indicate that anyone actually thinks Apple shares are now less likely to gain 10% in 2025-01. People do, almost by definition - the price is how you express an opinion. At the very least, you've shown yourself to be incompetent, which reduces everyone else's faith in your judgement. The Chinese government isn't unwinding its position in Treasuries for fun; they're doing it because they think dollars are going to be less valuable in the future, i.e. that China will be importing less and/or exporting more than they had previously thought.