What China selling US Treasurys really means
If someone would have suggested, as recently as six months ago, that China would sell over $150 billion of U.S Treasurys in a handful of months, analysts would have warned of an impending disaster in the U.S. bond markets.
Forecasters would have said that the dollar would crash, rates would skyrocket and stocks would plunge as America's reliance on the kindness of strangers to finance its budget deficits had finally exhausted their generosity.
Tune in to CNBC's "Power Lunch" today at 1pm ET. Ron Insana will be a guest.
Well, guess what? China did just that and other global central banks have slashed their holdings of U.S. Treasurys with barely a ripple in the multi-trillion dollar bond market.
Once again, the prophets of doom were wrong. And again, wrong for all the wrong reasons.
First, the sale of U.S. Treasurys by the Chinese was far from a repudiation of America's fiscal policies. It was an act of desperation to cover capital flight that has plagued China, and other emerging-market economies in the last several months.
It has been reported that Chinese nationals, despite restrictions, have moved a half trillion dollars abroad … into the relative safety of U.S. real estate, among other offshore assets, as the Chinese market melted down. So, too, in other emerging-market nations.
Chinese foreign-exchange reserves have also fallen markedly as Beijing spent quite liberally trying to prop up said market, forcing the government to raise cash to replenish their coffers.
As NYSE floor trader Art Cashin has long said, "When you can't sell what you own, you sell what you can." With the U.S. Treasury market among the most liquid and deepest markets in the world, China's bond sales were easily absorbed.
The other reason there was scant impact on U.S. interest rates is the desire, and/or requirement, among many financial institutions to hold high quality, long-dated bonds.
With capital requirements rising for banks, brokers and insurers, U.S. Treasurys fit the bill quite nicely as Tier One capital. In addition, while rates are low, U.S. Treasurys have generally higher yields than other sovereign bonds, not to mention infinitely less credit risk.
The higher yields in the U.S. are also reflective of relative economic strength … witness negative interest rates in some parts of Europe and near-zero returns on Japanese bonds of similar maturities.
In other words, there were willing buyers for whatever China, Middle Eastern and emerging-market nations offered for sale.
All of this happening AFTER the Federal Reserve ended its bond-buying programs that, over the last several years, were designed to keep long rates low and stimulate domestic growth.
Many of the prophets of doom also said that the dumping of U.S. debt would come as America's budget deficits continued to rise from the record $1.4 trillion print back in 2009. Instead, deficits have been slashed by more than 50 percent and are now less than three percent of U.S. GDP.
In other words, the world is not choking on U.S. debt, instead, there is a relative shortage of it.
As always, it is easy to predict the end of the world, as we saw on the night of the "blood moon," and again on Sept. 23 (another date with supposed apocalyptic significance). But the end of days never arrived.
The doomsday clock may still be ticking, but the time bomb is more likely to go off outside the U.S. while bonds remain the world's safest and most resilient economic bomb shelter.
Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.