Treasurys declined today, pushing yields higher, after Chinese Premier Wen Jiabao made some noises about the safety of its U.S. bonds.
Wen called on the U.S. to “maintain its credibility, honour its commitments and guarantee the security of Chinese assets,” according to reports.
Because China is the largest holder of Treasurys, people pay close attention to what Chinese officials say about Treasuries. But the odds are this is largely posturing ahead of the G20 meeting next month. China wants to flex its muscles and warn people like Tim Geithner not to start throwing around accusations of currency manipulation.
The fact is that China has little choice but to buy bonds. Last week we sat down with Wei Li, of the Cheung Kong Business School, to ask him about China’s voracious appetite for Treasuries.
“U.S. Treasuries really are unique in the world in that the US government may be the only government in the world that has never repudiated its debt,” Wei said. He described this unique credit history as the legacy of Alexander Hamilton, who helped convince Congress to pay off all the debt from the Revolutionary War at face value.
China’s high savings rate, which is mainly produced by Chinese corporations seeking to offset the risks of spending profits by expanding operations in the growing Chinese economy, will likely mean that China will continue to buy up Treasuries, Wei explained.
“There’s little competition for Treasuries, in terms of safety,” Wei explained. European government bonds are weakened by both a history of defaults and currency risk, since the bonds are issued by individual sovereign states while the monetary supply is controlled by the ECB.
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