When you go to Toy"R"us this week end to buy the latest Little Tikes Endless Adventures Tikes Town for your son or daughter, you are not just helping Toys"R"us with their revenue and profit; in the globally connected world your purchase has the potential to affect treasury bond yields!
Most of the toys, electronics and clothing sold in US are imported from Asian countries, including China and Japan. When Toys"R"us imports its toys, most of them from China, it pays Chinese manufacturer in US dollars. The Chinese manufacturer needs to local pay wages and other expenses in China's local currency, the Yuan. When they convert the US dollars to the local currency, the Chinese government is left with US dollars; this then becomes China's foreign exchange reserves. Thanks to China's ever rising exports to the rest of the world, their current foreign exchange reserves are estimated at a whopping US $1.2 trillion! It also continues to grow at about US $200 billion a year.
China invests most of this money in US government backed bonds, one of the safest investments in the world. The pattern is similar for Japan. These investments have been funding US government deficits over several years and have been keeping robust demand for US treasuries. Analysts including Bill Gross, the founder and Chief Investment officer of Pimco, believe that this high demand has pushed the yields of these bonds down by at least 0.5% (in other words they are more expensive to buy due to demand).
Toy"R"us toy purchase to bond yields - that is the power of globalization.
I have written few times before on China chasing better yields than offered by the US government through an investment company funded by portion of the foreign exchange reserves. The company already made its first deal investing $3 billion in US based private equity firm Blackstone. It has been reported recently that China is likely to continue to invest in other assets in order to maximize returns. This trend may reduce the demand for treasury bonds in the coming years.
There you go, Little Tikes to bond yields!