Here’s another common one from the Ask Cullen page:
“Question: Cullen, what would happen if China dumped all it’s US dollar denominated bonds?”
Answer: Someone else would own them.
That’s like saying “what if Vanguard dumped all of its XOM shares?” Well, someone else would own them. Vanguard would sell their XOM shares and obtain cash and someone else would get rid of their cash and own (Exxon) XOM shares.
Vanguard owns about 5% of all outstanding XOM shares so it’s a huge amount. And if they were a forced liquidator or worried liquidator then it could put some pressure on prices. But it wouldn’t change the fundamentals of XOM. And so any major price deviations would be largely unwarranted.
If China decided to unload their holdings of U.S. Treasuries in a low inflation environment then my guess is that savvy bond traders would gladly scoop them up and exchange their paper dollars for something that generates a real return. China would be left holding a bunch of dead presidents that just sit there collecting dust and losing purchasing power. So what? The point being, unless the fundamentals supporting US government debt change (mainly, the fact that the USA produces 22% of all global output) then the fundamental support under the quality of US government bonds doesn’t change just because China decides to reallocate out of bonds. Just like Vanguard deciding to own fewer shares of XOM doesn’t mean that XOM is suddenly a bad company that isn’t worth holding at current prices.
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