US: Trump’s trade war to keep foreign investors away from US Treasuries - ING

According to Viraj Patel, Research Analyst at ING, while President Trump’s imposition of tariffs on US steel and aluminium imports last week may have been the first move in what could ultimately climax into a global trade war – the focus now turns to how key affected trading partners will choose to retaliate.

Key Quotes

“Indeed, investors may need to be aware that the choice of response could have varying implications for global markets in the near-term.”

“The logical response from major trading partners directly hurt by the latest US protectionist policy move – namely the likes of the EU, Japan, Russia and China (note Canada and Mexico’s exemptions from these tariffs means that their ‘war’ will now take place on the NAFTA battleground) – would be to enact retaliatory levies on US exports. But given that any challenge via a formal WTO process will be complex and lengthy, trading partners may alternatively seek to adopt the Sun Tzu philosophy of ‘subduing the enemy’ via a more indirect form of attack.”

“One way could be a collective buyers’ strike on US Treasury debt – and it just happens so that the next few days will see some pretty important US Treasury auctions ($21bn of 10-year notes on Monday and $13bn of 30-year notes on Tuesday). Foreign investors shying away from US Treasuries would be no new phenomenon – with auctions of late showing evidence of this already occurring.”

“Indeed, the US administration’s desire for a weaker US dollar – which the latest tariff policies merely corroborate – presents an opportunity cost for holding USD reserves and certainly undermines the attractiveness for any foreign investor (including central bank reserve managers) to hold US Treasuries. Structural macro reasons – namely a burgeoning US ’twin deficit’ – further underpins the theoretical case for the dollar to depreciate further. In a weak dollar paradigm, there are sufficient economic reasons for the largest holders of USTs (China and Japan) to diversify out of US Treasuries. The prospect of a global trade war may just well have lit a fuse under this diversification process – with major trading partners potentially rotating out US debt holdings at a quicker pace (or at least using the threat of this as a negotiating tool). Watch the US Treasury auction space this week – with the $ trading soft given the Trump policy uncertainty.”