Blame China if Your Treasury ETF Is Falling

It sounds like a conversation one might have with his or her irascible grandfather or Donald Trump: The United States owes China a lot of money by way of all the U.S. Treasurys China has gobbled up over the years, and one day, China is going to come calling, wanting to be paid.

That day may have already arrived. Sure, two days of surging equity markets is playing a part, but it is worth noting 10-year Treasury yields have jumped nearly 6 percent over the past five days. Bond yields rise as prices fall, and prices fall, usually, because investors are selling. China is doing that with some of its massive Treasury stakes because it needs dollars to support its recently devalued currency, the yuan.

China's Actions

“The People’s Bank of China has been offloading dollars and buying yuan to support the exchange rate, a policy that’s contributed to a $315 billion drop in its foreign-exchange reserves over the last 12 months.

Related Link: Exclusive: BMO Isn't Sweating China

"The $3.65 trillion stockpile will fall by some $40 billion a month in the remainder of 2015 because of the intervention, according to the median estimate in a Bloomberg survey,” reported Bloomberg News.

Recent data suggest China held $1.48 trillion worth of Treasurys, according to Bloomberg. Said differently, China's Treasury stake is more than double Apple Inc. AAPL's market value. China's sales of Treasurys may actually have been well-timed because some experts believe China was selling U.S. government debt as global stocks were sinking, meaning other investors were rushing into Treasurys and China's sales actually did not cause soaring Treasury yields.

Is It True?

Data suggest there might be something to that line of thinking. For the week ended August 25, no ETF has added more than the $1 billion taken in by the iShares Barclays Short Treasury Bond Fnd SHV. SHV has an effective duration of just 0.41 years, so its 30-day SEC yield is a scant 0.16 percent. Duration is a bond's sensitivity to interest rate changes.

Recent enthusiasm for SHV “clearly reflects levels of panic that institutional investors have experienced in recent sessions watching the SPX fall from a 2100 handle down to the 1800s before today’s rebound back to the 1977 level, at least temporarily,” said Street One Financial Vice President Paul Weisbruch in a note out Thursday.

The iShares Barclays 1-3 Year Treasury Bnd Fd SHY has also been a popular destination in recent days. SHY added nearly $526 million for the week ended August 25, better inflows than all but three ETFs over that span. Apparently, investors are not too concerned about China dumping longer Treasurys, because the iShares Barclays 20+ Yr Treas.Bond (ETF) TLT, an ETF with an effective duration of 17.26 years, has added $300.7 million in recent days.

On an incremental basis, some traders are betting on more upside for longer-dated Treasury yields. Whether China is the catalyst or not, the Direxion Daily 20 Year Plus Treasury Br TMV, an ETF that attempts to deliver three times the daily inverse performance of an index comprised of longer-dated Treasurys, has seen August inflows of $14.3 million.