Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Last year, China sold its U.S. Treasuries holdings at a record pace. Japan was also a big seller.

It was easy to interpret this sell-off as a response to the U.S.'s new president and his policies. And certainly some analysts did exactly that. But the reality, it seems, was rather different. 

The last four months in Washington haven't exactly been smooth, and the nation's foreign policy and growth-spurring plans are still unclear. And yet data released Monday show that China just increased its holdings of Treasuries by the most in two years in March, with Japan right behind it. 

Big Balance Sheets
China and Japan have started building back up their U.S. Treasury holdings again
Source: U.S. Treasury Department

This doesn't signify a sudden reversal in faith by China and Japan in President Donald Trump, just as their sales did not reflect a rejection. In fact, both probably had little to do with U.S. policies and more to do with the countries' management of their own liabilities and monetary policies.

China, for example, finally appears to be getting its capital outflows under control and has experienced some more stable growth, meaning that it doesn't have to spend as much to support its currency.

Meanwhile, President Trump hasn't exactly become more predictable, and it's even less clear how he plans to pay for his tax overhaul or how he intends to pass it. But the idea of a fundamental shift in the risk-and-reward proposition of Treasuries is so overwhelming that few institutions would be willing to bet on it. 

For example, President Trump has suggested he would accept a tax-plan overhaul that causes the U.S.'s deficit to deepen, potentially making the nation less creditworthy. But Senate Majority Leader Mitch McConnell told Bloomberg News on Tuesday that he wants any proposed tax plan to be revenue neutral. This muddle is fairly impossible to trade at this point, especially when paired with difficult-to-measure questions about inflation, productivity and how quickly the Federal Reserve ought to raise rates.

Big Puzzle
Despite a lot of political and monetary noise in the past two years, U.S. rates have stayed low
Source: Bloomberg

This is part of the reason the U.S. debt market has been so unnervingly quiet in the wake of escalating political drama. The largest investors are focused on themselves and their own needs rather than trying to predict big events.

Smooth Waters
Traders are pricing in historically low levels of volatility in Treasuries in the near term
Source: Merrill Lynch Option Volatility Estimate MOVE Index

So next time China or Japan starts selling U.S. government debt, it'll be wise to see it more as a reflection of their financing needs, not a proxy of international reaction to Trump. Some things aren't easily tradeable. At this point, many aren't even trying.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net