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China’s “Trimming” Its U.S. Treasury ETF Exposure… So Am I!

16 March 2010 at 1:02 am by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

Surprisingly, and perhaps even shockingly, investing in Treasury Bond ETFs has been profitable in 2010. Very few folks would have “thunk it.”

Consider all of the forces conspiring against treasury debt success. The U.S government’s triple-A rating is being “questioned.” Treasury yields are decidedly unattractive when compared to alternatives. We’re issuing new debt in record-breaking fashion to pay for an ever-expanding deficit. Worse yet, both China and Japan¬†have been¬†net “sellers” for the last 3 months.

And yet… check out the gains:

Popular Bond ETFs With Significant Exposure to Intermediate And/Or Long-Term U.S. Treasuries
          YTD %   % Below 200-Day EMA
SPDR Lehman Aggregate (LAG)     1.54%   -0.09%
iShares 3-7 U.S. Treasury (IEI)     1.74%   -0.11%
iShares 7-10 U.S. Treasury (IEF)   2.35%   -0.93%
iShares 10-20 U.S. Treasury (TLH)   2.47%   -1.00%
iShares 20+ U.S. Treasury (TLT)     1.19%   -3.63%


Before popping the champagne cork, however, one better look to the brewing trade tensions between the U.S. and China. We’re insisting that the Chinese let the currency markets determine the value of the yuan relative to the U.S. dollar.

Granted, it might be nice¬†if the Chinese¬†let their yuan appreciate against the dollar, as well as let the yuan appreciate against neighboring Asian currencies. Yet I find it sadly ironic that¬†the U.S. government believes it has any power to force China’s currency hand.

In fact, the more we have seen fit to tell China what to do, the more it sees fit to sell its U.S. Treasury debt. January marked the 3rd consecutive month in which the mainland has scaled back its holdings of U.S treasury bonds. Japan also lightened up on U.S. treasury bonds.

Indeed, a cheaper U.S. dollar would make American products less expensive for the Chinese consumer; ostensibly, it might also give its neighboring Asian partners an opportunity to export more goods to American consumers.

Nevertheless, if the U.S. escalates its “war of words” over China’s currency policy,¬†foreign holdings of U.S. treasury securities could¬†decrease substantially. Without Chinese buyers of U.S. treasury debt, the U.S. cannot finance its “ambitious” deficit spending.

China currently owns as much as¬†25% of all foreign-owned U.S. treasury debt. It follows that neither Japan nor the oil exporting countries will be able to fill the gap that China fills… should China markedly decrease its stake.

There are those economists who believe that the slow selling of treasury debt by China and Japan merely reflects “normalization” after the credit crisis; that is,¬†things are getting back to the way they ought to be, now that investors do not need to flock to the perceived safer haven of U.S. treasury bonds.

However, if¬† the bond rating agencies keep¬†warning the U.S. about its AAA status… if¬†foreign demand from the Far East for U.S. Treasury debt weakens…¬†then the¬†interest rates that the U.S government¬†pays is going to rise dramatically.¬†How long would¬†the Federal Reserve be able to keep rates relatively subdued if China “dumped” its holdings rather than “trimmed” them slowly?

I’m not waiting to find out.¬†I continue to trim/reduce/lower exposure to intermediate and long-term U.S. treasuries. What’s more, most Treasury Bond ETFs¬†are now below 200-Day¬†moving averages, a sign that¬†they are already in a¬†technical downtrend.

You can listen to the¬†ETF Expert Radio¬†Show¬†‚ÄúLIVE‚ÄĚ,¬†via podcast or on your iPod.¬†You can review more ETF Expert features here.

Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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