“The reason that caught his eye is because he borrows money at that rate. So, when the yield goes up and you’ve got a big budget deficit and you need to borrow money, nothing is gonna get a President’s eye more quickly ... than if the yield on those US treasuries starts going up and the cost of borrowing starts going up.”
China holds about US$760 billion of US Treasuries, making it one of the largest non-US holders.
Logan says a trade war can be fought across many fronts and China using its position in the bond market as leverage to put pressure on the US administration would be a rational thing to do.
“It would boggle your mind how much the US Treasury has to borrow every week. So, if your number one buyer stops showing up at the stall to buy your bonds, the price is probably going to go up to entice other people to buy them instead.”
Many KiwiSaver funds – especially the more conservative ones – invest in bonds, including US Treasuries, as bonds are generally considered a “safe haven” asset.
Logan says while the current situation has created volatility in the usually “boring” bond market, that volatility should be kept in context.
“When the bond market sort of goes through a bit of turmoil, we are talking maybe half a per cent to 1% to 2% moves – we’re not talking 8% in one day moves like you’ll see in the share market, or 20 to 30% drawdowns from peak to trough – so it’s relative."
Listen to the full episode of The Prosperity Project for more on the importance of the bond market, and if it is a worthwhile investment.
The podcast is hosted by Nadine Higgins, an experienced broadcaster and a financial adviser at Enable Me.
You can follow the podcast at iHeartRadio, Apple Podcasts, Spotify, or wherever you get your podcasts. New episodes are released every Monday.
