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China, a trade war and Treasuries

Foreign interest in U.S. Treasury securities has ticked up so far in 2018, peaking at about $3.1 trillion in March, before settling closer to $3 trillion by the end of May. Over that time, interest rates have risen to near 3% for the first time since 2011. The relationship between the two is negative, so as rates increase, foreign institutions sell their Treasuries. But more likely, the selling of U.S. debt securities by foreign institutions puts downward pressure on prices with reciprocal effect on interest rates.

Chinese holdings of U.S. debt have historically been a large piece of all foreign-held Treasuries. On average, Chinese holdings have been about 41% of all U.S. Treasuries held in foreign institutions, but that number has fallen to 38.5% in 2018. China's purchases look to be coordinated with the value of its currency relative to the dollar, so that as the renminbi depreciates, the government adds Treasuries to protect the value of its portfolio.

One byproduct of a tit-for-tat trade war could actually lead to an increase of Chinese Treasury holdings as less demand for currency for Chinese goods will devalue the renminbi.