[rtkwe]

I don't fully understand the authors reasoning either but one thing that is highly misunderstood about the bonds is that a) they're not callable, meaning that borrowers can't suddenly decide that they want to get their investment back and b) China while the largest foreign national holder of US bonds (iirc) holds >10% of the issued bonds. Almost all bonds are held here in the US in things like mutual funds and by retail investors.

[aliston]

30% of treasury bonds are owned by the Fed, and in some recent auctions, the Fed has purchased as much as 90% of the new issuance. We would have a major problem if China were to dump their bonds on the market because there aren't too many buyers when you're at such low interest rates.

[aliston]

Why the downvote? I was responding to the claim the impact of a Chinese bond dump is "misunderstood" because most bonds are held in the US by retail investors and mutual funds.

In fact, most treasuries are not held by retail investors or mutual funds in the US [1]. The largest buyer as of late has been the Fed [2], indicating that when the Fed is pursuing ZIRP, there aren't a whole lot of other buyers. If China were to dump its bond portfolio, either interest rates would spike, or the Fed would have to expand its balance sheet by another trillion dollars.

[1] http://useconomy.about.com/od/monetarypolicy/f/Who-Owns-US-N... [2] http://www.bloomberg.com/news/2012-12-03/treasury-scarcity-t...