Stories are circulating (Bloomberg) about China selling some of its holdings of U.S. treasury debt. The actions are being taken to raise capital to support the Yuan after the initiative devaluation steps. China holds an estimated $1.5 trillion of U.S. treasury debt and total foreign holdings are estimated to be close to $3.7 trillion.
More supply could put upward pressure on rates, outside of policy moves by the Fed. While not significant yet, this could be why the rate on the benchmark 10-year treasury is mostly unchanged following the swift market decline over the past two weeks. If China becomes more aggressive with its selling, this could result in an effective rate increase for our economy.
We will be watching for indications of further selling and /or movement in rates higher. Rising rates could have an impact for many assets in addition to bonds, including utilities, REITs and housing. In light of the historically low rate environment, we have attempted to limit our overall exposure to assets that might have the most rate sensitivity.
Chief Investment Officer
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