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Trade War Complacency

Brian Romanchuk profile picture
Brian Romanchuk

The escalating rounds of tariffs between the United States and China is an interesting point of economic debate. However, from the perspective of the interest rate markets, it appears to be one of those subjects that generates a great deal of economist commentary, but with limited market impact. This view is arguably complacent; whether it is too complacent is left for the reader to judge.

Things Could Go Horribly Wrong

It is entirely possible that escalation could continue, aided by the anti-moderation impulses of President Trump. If global supply chains were cut as a result of trade barriers, firms would need to scramble to rebuild them domestically. Countries would very rapidly hit capacity barriers, since they would have to ramp up industrial investment that has withered over the past decades.

This is easily one of the structural changes that could change the trend in inflation. Imported goods would no longer act as a deflationary undertow. As a result, this is an outcome that needs to be taken seriously.

China Dumping Treasurys -- Yeah, Whatever

The one risk that seems to captivate many Treasury bears is the possibility that China will dump its Treasury holdings, causing yields to soar. In my view, this is just sour grapes by commentators who were wildly wrong about Treasury yields in the past. They want to blame Chinese Treasury purchases for being wrong then, and so they want to believe that they will be vindicated by history.

The proper way to frame this risk as follows: if the Chinese wish, they could lose a lot of money selling Treasury securities rapidly. This would also cause the CNY to spike, doubling down on the pain for their exporters. (They would have little choice but to buy their own currency; if they attempted to destabilise the Treasury market, no other developed country would welcome

This article was written by

Brian Romanchuk profile picture
I have 15 years of experience as a senior quantitative analyst in fixed income. I specialized in the development of research systems and analytics. Currently a consultant and blogger. I have a B.Eng. in electrical engineering from McGill University, and a Ph.D. from the University of Cambridge in control systems engineering. I am a CFA Charterholder.

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Comments (1)

SuperPac profile picture
One of the more mature articles on the subject of trade skirmish. Also, insightful analysis of American political landscape / tendencies. I enjoyed reading this. Thx.
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