The ongoing tensions over trade policies and tariffs have raised questions about whether major U.S. bondholders like China and the European Union (EU) might retaliate by selling their U.S. Treasury holdings. At first glance, this might seem like a powerful economic weapon. But a closer look reveals why this move is less threatening than it appears.
The Federal Reserve’s Secret Weapon: Unlimited Buying Power
The U.S. Federal Reserve has a powerful tool that can offset any potential disruption caused by mass bond sales. It can create money and purchase Treasury bonds in virtually unlimited amounts. This means that even if China and the EU decide to sell large quantities of their holdings, the Fed can step in as a buyer to stabilize the bond market and keep yields in check. This mechanism makes it difficult for foreign powers to manipulate U.S. borrowing costs in a meaningful way.
What Happens to the Proceeds?
When China and the EU sell U.S. Treasuries, they receive U.S. dollars in return. However, these dollars do not generate returns unless they are invested. To earn interest or returns, these dollars must be converted into other currencies or invested in foreign assets. This process involves selling the dollars on the global market, which increases the supply of dollars and drives down its value.
A Weaker Dollar: Double-Edged Sword
If the dollar weakens, the impact is nuanced. For the United States, a weaker dollar could help boost exports by making U.S. goods more competitive internationally. This might partially counteract the damage caused by tariffs. On the downside, imports become more expensive, potentially fueling inflation. For China and the EU, a depreciated dollar reduces the value of their remaining dollar-denominated assets, making their bond sales self-defeating.
Bond Values and Market Risks
Currently, China and the EU hold around 20–25% of all U.S. Treasuries—not the overwhelming majority. If they flooded the market with bond sales, prices would drop and yields would rise. However, this also means they would incur losses on their remaining holdings. Furthermore, higher yields could create global financial turbulence, which might harm their own economies.
Yet again, the Fed’s intervention by buying these bonds would help maintain price stability, blunting the intended financial pressure.
The Broader Financial Ecosystem
U.S. stocks might also benefit as global investors seek safe-haven assets in times of uncertainty. Even if bond markets were temporarily shaken, strong inflows into U.S. equities could keep overall financial markets resilient. This weakens the threat posed by foreign bond sales, especially when markets anticipate the Fed’s willingness to support the economy.
The Bottom Line: Limited Leverage
Several factors limit the effectiveness of using Treasury bond sales as a strategic weapon:
- The Federal Reserve can stabilize markets through unlimited bond purchases.
- A weaker dollar may benefit the U.S. through increased exports.
- China and the EU risk financial losses and diminished value of their remaining holdings.
- Market reactions are unpredictable and may backfire on the sellers.
In essence, while selling U.S. Treasuries might seem like a bold retaliatory move, the consequences are complex and often counterproductive. Rather than damaging the U.S. economy, such a move could hurt the very countries attempting to wield this financial weapon. In a deeply interconnected global economy, strategic patience and negotiation remain more effective tools than monetary threats.