Question

1. Last week (January 10, 2018), Chinese government officials announced that China will be slowing or stopping to purchase United States treasury bills. How does that affect the interest rate on the United States treasury bills? Explain.

Answer 1

Chinese government officials recommended halting or slowing purchases of U.S. Treasury’s because the debt is less attractive compared to other assets and, possibly, because trade war between the China and U.S. If China abstains from purchasing U.S. treasury bills, the rates of interest in U.S. on the margin could increase more than expected. The biggest impact would be on rates of interest and prices of bonds

The supply of U.S. bonds spikes when China halts or slows the purchases of U.S. Treasuries. Consequently the fixed income prices would decrease and yields would increase. When yields rise then it would become more expensive for U.S. consumers and companies to borrow. Thus it will become more expensive for the U.S. government for issuance of debt; as higher rates will be paid to borrowers. The higher rates of interest would ripple through the entire U.S. economy and as a result has to slow down hurting economic growth