Global Bond Value Evaporates by 2 Quadrillion Won... China’s U.S. Treasury Holdings Fall Below $1 Trillion

Impact of Bond Yield Rise Due to Major Countries' Tightening
Decrease Larger Than During 2008 Financial Crisis
Over 70 Corporate Bond Issuances Postponed or Halted in First Half
Financial Instability Worsens in Highly Indebted Emerging Markets

[Asia Economy Reporters Kim Hyunjung, Lee Hyunwoo] The global bond market is experiencing a sharp decline in value due to monetary tightening by major countries. More than $17 trillion (approximately 22,400 trillion KRW) evaporated in the first half of this year alone, which is twice the decrease seen during the 2008 global financial crisis. China has reduced its U.S. Treasury holdings to below $1 trillion and has begun measures to address potential investment losses and capital outflows.

On the 19th, Japan's Nihon Keizai Shimbun reported that bond values tracked by the Bank for International Settlements (BIS) fell sharply by about 12%, from $142 trillion at the end of last year to $125 trillion as of the end of June this year. The Bloomberg Global Aggregate Bond Index also dropped 12% in the first half of this year, significantly exceeding the 6% decline during the global financial crisis period of 2008 (May to October).

◆Tightening Leads to Rising Bond Yields... Concerns Over Emerging Markets= As major countries implement monetary tightening to combat inflation, rising bond yields imply falling bond prices. The pace of government bond yield increases is even steeper in Southern European countries with weaker fiscal health. Italy's 10-year government bond yield, issued by the government at the end of last month, reached 3.47%, the highest in eight years.

The corporate bond market is experiencing a similar trend. Borrowing costs for companies with low credit ratings are soaring endlessly. The yield on bonds issued by European sports betting company 888 Holdings exceeded 11%, but actual investor demand has cooled, according to Nihon Keizai Shimbun. Bloomberg reported that over 70 corporate bond issuances worldwide were postponed or halted in the first half of this year, nearly double the 37 cases in the same period last year.

The financial systems of emerging markets are in an even more precarious state. Emerging markets, which have relied heavily on debt, face the risk of falling into a "Doom Loop," where declines in domestic government bond prices reduce banks' equity capital. According to the IMF, the proportion of domestic government bonds in emerging market banks' total assets rose from around 12% during 2010?2014 to 17% last year. In the past, during Russia in 1998 and Argentina in 2001?2002, banks with sharply reduced equity capital became reluctant to lend, negatively impacting the economy.

According to the Institute of International Finance (IIF), the global debt stock, including emerging markets, has surpassed $300 trillion, growing about 3.5 times over the past 20 years. This growth outpaces the increase in global gross domestic product (GDP), which rose about 2.5 times during the same period.

China Reduces U.S. Treasury Holdings to Address Investment Losses and Capital Outflows
Also Seen as a Deliberate Strategy to Resist Dollar Hegemony

[Image source=Yonhap News]

◆China's U.S. Treasury Holdings Fall Below $1 Trillion for First Time in 12 Years= China has begun reducing its holdings of U.S. Treasuries. On the 18th (local time), the U.S. Treasury Department announced that as of May this year, China's holdings of U.S. Treasuries stood at $980.8 billion, falling below $1 trillion for the first time since May 2010.

This move is interpreted as a response to growing concerns over investment losses due to U.S. interest rate hikes and large-scale capital outflows from emerging markets including China. The yield on the benchmark 10-year U.S. Treasury bond nearly doubled, rising from 1.512% at the beginning of the year to 2.989% yesterday.

The intensifying capital flight from China and emerging markets due to rising U.S. interest rates is also believed to have influenced China's sales of U.S. Treasuries. According to the IIF, foreign investors sold a net amount exceeding $2.5 billion in China's bond market in June, marking the largest capital outflow in seven years. Especially considering the large-scale capital flight China experienced during the U.S. rate hikes from 2015 to 2016, it is estimated that China is continuously selling U.S. Treasury assets to prepare for foreign currency outflows.

Jonathan Fortun, an economist at the IIF, told Hong Kong's South China Morning Post (SCMP), "During 2015?2016, fears of U.S. rate hikes and yuan depreciation overlapped in China's securities and bond markets, leading to capital outflows exceeding $670 billion," adding, "Geopolitical issues such as the Ukraine crisis, U.S. monetary tightening, and inflation concerns have combined to greatly increase capital outflow risks for China and emerging markets."

There is also analysis suggesting that the Chinese government is deliberately reducing its U.S. Treasury holdings to lower dependence on U.S. capital and resist dollar hegemony. Tian Yun, former vice chairman of the Beijing Economic Operation Association, told the state-run Global Times, "This can be interpreted as growing Chinese resistance to U.S. dollar hegemony," and added, "In the long term, China should pursue diversification of its foreign exchange reserves, increase gold holdings, and develop plans linking exports of key resources such as rare earths with the yuan."

This content was produced with the assistance of AI translation services.