Treasury Secretary Bessent Plays Down Foreign Bond Dumping Claim
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Bloomberg Audio Studios. Podcasts, radio, news. Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. China appears to be done retaliating against President Trump's exorbitant tariffs. Beijing has called the Trump administration's actions a joke that it no longer considers worthy of matching.

So the question now is whether President Xi Jinping will find a more potent weapon to strike back at his opponent. For a closer look now, I am joined by Bloomberg Opinion columnist Shuli Ren. Her latest column titled, Why Wouldn't China Weaponize Its Treasury Holdings? Shuli joins us from Hong Kong.

It's always a pleasure. In this piece, Shuley, you remind us that last Friday in Beijing, leadership essentially reiterated its vow to fight to the end. And might not this fighting include selling U.S. treasuries?

That's the worry. So last week we saw a pretty big Treasury bond route, right? And with the Treasury 10-year yield up by 50 basis points. And some of the sharpest spikes occurred during the Asia hours, leading to speculations that, you know, maybe some Asian central banks are on the move.

And Japan has come out saying that they will now weaponize their treasury holdings. And by the Treasury Department's data, they are the biggest foreign creditor. But China is next. So there are worries that China is going to create a little bit of a chaos.

to the U.S. government bond market. So on Monday, we caught up with Treasury Secretary Scott Besant during a trip to Buenos Aires, and we asked him whether foreign holders were dumping U.S. treasuries. Here's what he had to say. I don't think there's a dumping. And I think we saw in the tick data either today or Friday that actually foreign ownerships picked up.

We had three big auctions last week, and on the longer end auction, 10-year, 30-year, we saw increased foreign competition. So I actually think this is one of those occasional VAR shocks that you get in the trading community. I think a lot of people got very leveraged maybe out over their skis.

And then you combine that with some real money selling and you get these moves. So you don't think it's sovereigns? Potentially it's hedge funds unwinding? I have no evidence that it's sovereigns. And look, Anne-Marie, not you, but the nature of journalism is to create a headline that 10 days ago when 10-year yields hit 390 said, well,

Secretary Besson got what he wanted. He got 10-year yields down, but it's the wrong reason. Now, I forget what they hit on Friday, maybe 440-something. We saw a 50-basis move last week in 10-year yields. At the same time, the dollar was weakening nearly 3%. How do you simultaneously look at that?

at that situation. It feels like investors are dumping U.S. assets. Well, look, I've learned that not to look at what happens over a week. I, for better or worse, have lived through a lot of these things. And in trading, in one's personal trading history, it's the scar tissue that sticks with you the most. I can tell you exactly where I was standing in 1998 when the long-term capital crisis

The debacle happened. That had nothing to do with anything other than a bunch of geniuses up in Greenwich who had too much leverage. Treasury Secretary Scott Besson during his trip to Buenos Aires speaking to Bloomberg's Anne-Marie Hordern. Shuley, you heard what he had to say. Are you buying it?

I mean, there is the sense that the basis trade, hedge funds unwinding basis trade, created some turmoil in the Treasury market. But I think what Treasury Secretary Benson said, he cited the TIC data, basically. It's a data release provided by his own department. I think that's only part of the picture because this data collects information

information from US custodian banks. So say I was a China central bank, my holdings with US custodian banks will be disclosed in the treasury data. But I can also have treasury holdings with European custodian banks in Europe, say in Belgium, with Euroclear. And that is not reflected in the data that the treasury secretary can see.

So in my mind, thinking of data, China's got about $760 billion in U.S. Treasury securities, $3 trillion in U.S. dollars held in reserve. So there's a lot of pressure here that China could apply, right, if this trade negotiation or whatever we're in right now doesn't go well. And what you point out is that the abrupt turn that President Trump made last week

essentially exposes the White House's Achilles heel. And I'm just wondering how effective the Trump administration can be in these trade negotiations with this sword of Damocles kind of hanging over its head.

Exactly. I'm not sure President Trump knows what the art of the deal is, or definitely it doesn't seem like he knows what the art of the war is. Basically, he showed the world his pinpoint last week, right? He basically said, "Okay, I'm halting the tariffs on the rest of the world because I saw the bond market was not doing so well." Then everyone knows that's Trump's pinpoint.

I mean, of course, the Chinese government doesn't have strong incentives to basically fire sale and dump all its US dollars because, you know, it will have to incur some losses, right? But it could tease. It could tease Trump because Besant, he is in charge of...

tariff negotiations, and he is a self-acclaimed biggest bond salesman in the U.S. And he talks about how much he cares about the bond market and the bond yields. He said that one percentage point rise in 10 years will cost the U.S. government $100 billion. So we all know that's their pain point.

So, Shuli, I'm wondering whether or not these moves and the conversations around them is really fueling talk of de-dollarization and whether major central banks around the world will become even more aggressive in moving away from the dollar.

I think it's already happening. If you look at the IMF data, the US dollar accounted for over 70% of global foreign exchange reserves 20 years ago. Now it's less than 60%. And especially in the last couple of years, right, like the US treasuries have been very volatile and the total returns have not been good. So it's not just China, it's everyone else as well trying to diversify a little bit.

One of the other topics that came up during the conversation with Treasury Secretary Besant was independence of the Fed and the fact that the administration is going to be looking for a replacement for Fed Chair Jay Powell when his term is up. And

Those conversations will happen in the fall. We've talked a little bit in the past about the possibility that the Fed would face pressure from the White House. And I'm wondering whether or not maybe the pressure wouldn't come in terms of adjusting the policy rate. But I'm wondering about pressure to use the balance sheet as a way of controlling what's happening in the Treasury market. Do you think that's a real risk?

I think it's very much on the table. In this sense, the Treasury Department and the Federal Reserve are aligned. U.S. government does not have incentives to see its borrowing costs soaring, right? It's not good for the fiscal economy.

It's also not good for the broader economy because U.S. government bond yield is the benchmark for everything, for mortgages, for corporate loans. So in this case, if the 10-year yield spikes to, like, say, 4.7%,

I think the Fed could make a move. We'll leave it there. Shuli, it's always a pleasure. Thank you so much. A Bloomberg Opinion columnist, Shuli Ren, in her latest piece writing, Why Wouldn't China Weaponize Its Treasury Holdings? Shuli, joining us from Hong Kong here on the Daybreak Asia podcast. Want to understand trends shaping the global investment landscape?

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. So a measure of calm seemed to return to financial markets today after seven sessions of volatility. We had U.S. equities pushing higher with the S&P picking up around eight tenths of one percent. All but one of the S&P's 11 industry groups advanced.

Consumer discretionary was the only decliner. Joining me now for a closer look at the price action is Ross Mayfield. He is investment strategist at Baird. Ross, thank you for joining us. So this news on trade policy has been so dynamic and it's created a lot of volatility. We've seen that. Do you expect this volatility to be the new normal?

I do think so. Because this policy is being rendered via executive action and not going through the kind of normal legislative process, I think even as some of the tariff threats get pulled back and negotiations

keep occurring, it's going to be hard for business leaders to ever feel a sense that they can invest for the next three to five years because a lot of these policies can be reversed back on overnight and even levied in some sort of exchange that's not really trade or economic related. We've seen that with deportations, fentanyl, things like that. So it's really hard to have confidence in that.

lack of confidence leads to volatility. No doubt. I mean, President Trump today floated the possibility of temporary exemptions for auto parts. Over the weekend, there was this idea that maybe some of the tech sector could be immune, at least temporarily as well. And now we're learning that the administration has started investigations on the impact of certain imports like semiconductors and pharmaceuticals on U.S. national security. So it's difficult to kind of identify the next

potential pressure point and then as a result, make an adjustment and avoid that space, is it not? Yes, extremely so. I mean, it's difficult for business owners, I imagine. It's also difficult for investors to get a sense of how this might play out. Obviously, I think you can feel

To the extent you can feel confident about anything right now, you can feel a little confidence that at a minimum, that Trump put is still somewhere out there. The bond market activity reversed the worst possible outcome of this policy prescription. We saw the negotiations. We've seen the 90-day pause. So I think at a minimum, you can feel confident that there's some sort of tail risk downside scenario that's removed. But past that, we could go anywhere from here. And I don't think anyone should be surprised.

If there's a beneficiary or a group of beneficiaries, I think you have to look at the big banks, right? I mean, today we had Goldman reporting its highest ever quarter in terms of overall trading revenue. And the story was similar for both JPMorgan Chase and Morgan Stanley. So to be fair, there are some bright spots, right? When you look at this market volatility, you got to look at the guys who are trading and generating revenue, right?

Yeah, absolutely. And the banks and financials were one of the cleanest ways to lever up this new administration anyway. Even if you didn't expect this coming, you saw a deregulatory environment coming down the pipe, potentially a ramp up in M&A and IPO activity with a more typically business-friendly administration.

The banks, and obviously not super levered to tariffs and trade either, pretty domestic. I know they do some lending. So, yeah, the banks and the financials look in about as good a position as you could hope for. Let's talk a little bit more about the bond market, because we heard today from Treasury Secretary Scott Besant, and one of the questions that we put to him was whether or not foreign holders were dumping U.S. Treasuries. He pushed back on that a bit, saying he didn't think there was any dumping.

But I'm wondering whether you think the conversation around tariffs and trade tensions more broadly might cause foreign holders of U.S. Treasuries to perhaps take a second look and maybe even lighten a position. Yeah, absolutely. I think that's part of a larger trade you're seeing here where the dollar has been down as well.

um maybe against expectations for a country putting on tariffs so yeah i think at minimum other countries are going to want to continue to diversify you know away from the dollar if only so that they're not um you know so linked and so potentially vulnerable in negotiations with the us you know we've seen this big move in gold i imagine that has a lot to do with central bank diversification as well so um

Yeah, I think it's completely on the table. So I'm curious about the trading strategies that you're using right now, given everything that we're describing. What are you doing?

Well, when you get a big sell-off, a big sharp sell-off, you typically are rewarded if you go risk on as long as you can stomach the next six to 12 months. Usually, your returns are strong year out. So just generally buying the dip, but focusing on high-quality companies, knowing that even in this kind of uncertain scenario, you still are in a higher for longer rate environment. So sticking high quality and then to the extent

Zooming out past the next couple of years of trade war and tariffs and thinking about adding to secular winners, things in the AI space, for example, that might be rocky over the next year or two, but have that long-term growth potential in a slower growth world.

So higher for longer rates. And when I hear you say that is OK, tariffs will probably be inflationary and the Fed is going to be on guard and keep rates steady. And the idea that we're going to see multiple rate cuts this year may need to be rethought. Is that right?

I think so. The Fed can change their mind quickly as spots of weakness pop up, and certainly the bond market has been under pressure. But yeah, they've basically said their worries and concerns about the inflationary impact of tariffs outweighs their concerns about growth right now, even as the underlying economy is cooling in many spots. And then you do have the pressure on the long end, just from the uncertainty around this policy prescription.

Higher for longer rate environment, very different from the 2010s. And I think that lends a credence to focusing on companies that are generating cash flow, not relying on capital markets to a large extent. I'd like to get your take on the U.S. consumer. Interesting today that LVMH, one of the

bellwethers when it comes to the luxury industry, reported sales that were down more than expected. Obviously, we saw weak demand coming out of China, maybe a little bit of a surprise there, the fact that the U.S. showed some weakness as well. Did that kind of change your opinion of where the consumer is right now? A lot of times we get very concerned about the down market participation, but now we're talking about a company that caters to the luxury sector.

Yeah, I think it's across the board uncertainty has kind of put a pause on consumer spending. We entered the year not with the robust consumer we'd seen in 2023 and 2024, but certainly not in a bad spot and not over levered. I think importantly, debt to income ratios are largely in check. But this uncertainty that's weighing on the economy via tariffs and the potential for higher inflation, I think has really just put a chill on things.

You look at some of the soft data like consumer confidence falling to lows not seen since the financial crisis. And you can get a sense that consumers are on pause for now, similar to how businesses are acting just because of the uncertainty. So I think they're

Not a trouble point, but certainly cooling and this policy uncertainty isn't helping. I'm wondering whether you're looking offshore at all in the current environment and whether or not there is still some attraction to stocks in Europe right now. I know they've been on an amazing run so far this year. Do you think Europe's got more upside?

I definitely do. First and foremost, I think international diversification becomes much more important in this post-trade, post-Pax Americana kind of world. You just have much more uncorrelated return streams from different trading blocks, the dollar perhaps not as dominant. I think international diversification in general is going to be more important. Then on Europe,

I mean, they're still stimulating. At a minimum, you look at their economy and you see those fiscal promises and you see what the aerospace and defense stocks are doing, anticipation of getting to the NATO defense spend requirements. And you say, well, at least that's an economy that's stimulating. China is stimulating. So I think there's plenty of opportunity abroad, even if this trade war kind of helps China

but no one in aggregate. We'll leave it there, Ross. Thank you so much. Always a pleasure. Ross Mayfield there. He's the investment strategist at Baird. Joining us here on the Daybreak Asia podcast.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krisner, and this is Bloomberg. ♪

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