Apollo Academy
- China has sold $300 billion worth of US Treasurys since 2021, including $40 billion since April 2023.
- Apollo Global Management's chief economist suggested this could be a driver of spiking US bond yields.
- Economic woes have meant China has fewer dollars to recycle into US Treasurys, Torsten Sløk wrote.
US bond yields have been soaring recently, and one potential driver could be across the Pacific Ocean: China.
To be sure, US inflation remains above the Federal Reserve's comfort level, and central bankers have suggested more rate hikes are necessary, contributing to a sell-off in Treasurys.
On Tuesday, the yield on 10- and 30-year Treasurys hit the highest levels since 2007 as job-opening data pointed to continued tightness in the labor market.
But in a blog post, Apollo Global Management's chief economist Torsten Sløk looked beyond the US economy.
"Maybe China is behind the rise in US long rates," he wrote. "Growth in China is slowing for cyclical and structural reasons, and Chinese exports to the US are lower. As a result, China has fewer dollars to recycle into Treasuries."
China has sold $300 billion worth of US Treasurys since 2021, he added, noting that the pace of sales has accelerated more recently, with $40 billion sold since April of this year.
It's a significant observation considering that China ranked as the second biggest foreign holder of US Treasury securities as of March, according to Treasury Department data. And until about a decade ago, it was building up its stockpile of Treasurys before it began to trend lower.
More recently, China has also been selling US Treasurys to prop up the yuan, which has been weakening against the dollar.
The Chinese sell-off of US bonds, combined with Fed's quantitative tightening, the US credit downgrade, Japan's exit from its yield curve control policy, and growing issuance of Treasury debt, could mean that even a bad US jobs report on Friday that points to a softer economy may not lower rates much, Sløk wrote.
"The bottom line is that the cost of capital will likely stay permanently higher for reasons that have little to do with the business cycle, and it was the period with essentially zero interest rates from 2008 to 2020 that was unusual," he added.