Nations may dump US debt in case of global trade war: analysts

March 05, 2018 09:05
US President Donald Trump’s announcement of stiff tariffs on imported steel and aluminum touched off outcries of unfair protectionism from trading partners. Photo: Reuters

US President Donald Trump’s plan to slap stiff tariffs on imported steel and aluminum has rattled financial markets and stirred fears that some trading partners might retaliate by dumping US Treasuries, Reuters reports.

Should China, Japan and other nations, which have recycled their trade dollars through their Treasuries holdings, suddenly decide to whittle them down, markets could be in for a rough ride, the news agency said.

Such a retaliatory move, in the wake of Trump’s first big protectionist action, comes at a time when foreign demand for US debt is seen critical to offset an expected surge in federal borrowing needs, analysts and investors said.

“The threats are real,” said Kristina Hooper, chief global market strategist at Invesco in New York. “We need more foreign demand, not less.”

To be sure, it is unlikely that Beijing, Tokyo and other overseas central banks would dump Treasuries altogether, if at all, analysts and investors said. Countries could wind up torching their own US bond investments, without winning any guaranteed gains from Washington, they said.

“They already own a lot of them. They would be shooting themselves in the foot,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management in Philadelphia.

Still what US trading partners might do with their collective ownership of more than a quarter of all Treasury securities outstanding looms as a hefty risk not only for the bond market.

Treasury yields are benchmarks for total returns on stocks and other assets. Typically when yields go up, stock prices fall.

The yields are also used by banks and other lenders to determine what they charge consumers on mortgages and other loans. US mortgage rates hit four-year highs last month.

'High-pressure' response

Trump’s announcement on Thursday of 25-percent and 10-percent levies on foreign steel and aluminum touched off outcries of unfair protectionism from trading partners, while it drew cheers from domestic producers as a move to combat questionable export practices by other countries.

“It’s a high-pressure response,” said Jason Celente, senior portfolio manager at Insight Investment in New York.

Details of Trump’s tariff plan are still unknown, and Celente said the tariffs might not be imposed at all after criticism from Republican lawmakers and US industries heavily dependent on steel and aluminum.

Still, Trump said on Twitter on Friday that “trade wars are good”, and the rhetoric has heated up. Canada and the European Union said they are ready to take countermeasures, while China urged Trump to show restraint.

“The timing of this would be poor since the Treasury needs to tap the capital markets more than ever, in greater size, to pay for the plentiful tax cuts passed a few months ago,” Kevin Giddis, head of fixed income capital markets with Raymond James in Memphis, Tennessee.

Top holders of US debt

The massive tax overhaul enacted last December was projected to add up to US$1.5 trillion to the US debt load over a decade, while a two-year spending deal reached last month would add US$300 billion to the deficit.

At the end of 2017, foreign governments owned US$4.03 trillion or nearly 29 percent of the US$14.47 trillion in Treasury securities outstanding.

China and Japan, two major US trading partners, are also the top two foreign holders of Treasuries with a combined holdings of $2.25 trillion in December, Treasury data showed.

In 2017, the United States rang up a US$375 billion trade deficit with China and a US$69 billion trade gap with Japan, according to the US Census.

In Beijing, a senior Chinese diplomat said on Sunday that the country does not want a trade war with the US but will defend its interests.

Trade tensions between the world’s two largest economies have risen since Trump took office in 2017, and although China only accounts for a small fraction of US steel imports, its massive industry expansion has helped produce a global glut of steel that has driven down prices.

Negotiations and mutual opening of markets were the best ways to resolve trade frictions, Chinese Vice Foreign Minister Zhang Yesui said at a briefing ahead of China’s annual session of parliament, which opens this week.

“China does not want to fight a trade war with the United States, but we absolutely will not sit idly by and watch as China’s interests are damaged,” said Zhang, who is a spokesman for parliament and was formerly an ambassador to the US.

“If policies are made on the basis of mistaken judgments or assumptions, it will damage bilateral relations and bring about consequences that neither country wants to see,” he said.

Trump believes the tariffs will safeguard American jobs, but many economists say the impact of price increases for users of steel and aluminum, such as the auto and oil industries, will destroy more jobs than curbs on imports create.

Exemptions for businesses

Trump's trade adviser said on Sunday a process will be in place for businesses to get exemptions from the White House plan to place steep tariffs on steel and aluminum.

Peter Navarro, director of the White House National Trade Council, said countries will not be excluded from the tariffs because that would become a slippery slope, but there will be a mechanism for corporate exemptions in some cases.

“There will be an exemption procedure for particular cases where we need to have exemptions, so that business can move forward,” Navarro said on CNN’s State of the Union program.

-- Contact us at [email protected]