The current United States becomes nervous and anxious whenever China is mentioned. Now, the financial battle between China and the U.S. has become very similar to the fifth campaign of the Korean War against the U.S., with both sides fighting while negotiating. What cannot be obtained on the battlefield is also difficult to achieve at the negotiation table.

At this stage of the financial war, facing the rapid advancement of the internationalization of the Chinese yuan, is there still a possibility for the U.S. dollar and U.S. debt to make a comeback against the wind?

Who is selling U.S. Treasury bonds, is it China?

Since the Federal Reserve announced a rate cut on September 19, the price of U.S. Treasury bonds has been falling continuously, with the yield on 10-year Treasury bonds soaring from 3.6 to around 4.3.

On October 25, U.S. Treasury bonds suffered a large-scale sell-off, reaching a critical point. What is more crucial is that the market is speculating that those selling U.S. Treasury bonds this time are not others, but banks within the United States.

According to a report in The Wall Street Journal, at a meeting in early October, Stanley Druckenmiller, the second-in-command of Soros Fund, revealed that they are shorting U.S. Treasury bonds, and their short position has reached 15%-20%.

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The American billionaire and founder of the Tudor Fund also publicly stated that he is shorting U.S. Treasury bonds and going long on gold and Bitcoin.

If this trend continues, the yield on U.S. 10-year Treasury bonds will soon reach around 5%, which is not a good thing for the monetary policy that the Federal Reserve is about to implement.

The interest rate on U.S. Treasury bonds influences the Federal Reserve's interest rate decisions to a certain extent. If the yield on 10-year U.S. Treasury bonds rises above 5%, it indicates that the last two interest rate decisions by the Federal Reserve to cut interest rates have become very difficult.The primary reason these titans are heavily shorting U.S. Treasury bonds is that, according to U.S. economic data, not only is the U.S. not in a recession, but the Federal Reserve's erroneous move to cut interest rates by 50 basis points in September may plunge the U.S. back into inflation.

More importantly, based on the current U.S. election situation, if Trump is elected as the next President of the United States in November, in line with his governance plan and campaign promises, after 2025, Trump will implement tax cuts and increase fiscal spending in the United States. This will exacerbate the already unbalanced U.S. fiscal situation. Whether it's Trump or Harris, turning a blind eye to the U.S. fiscal deficit issue will be the fuse for U.S. debt default.

For a long time in the future, selling U.S. Treasury bonds will be the most popular trade on Wall Street. Currently, there is a contradiction between the Federal Reserve's monetary policy and Wall Street's trading. Many politicians worry that this interest rate cut decision by the Federal Reserve will weaken the influence of the dollar in the world in the future, providing opportunities for the yuan to expand its market share.

However, if the U.S. does not cut interest rates, the annual interest expenditure of the U.S. Treasury will become a major cost.

First U.S. debt crisis since 1995

As of the end of the second quarter of 2024, the U.S. Treasury had approximately $35 trillion in unreimbursed debt, of which 33% of U.S. Treasury bonds were held by U.S. government funds such as social security and the Federal Reserve, and $9.2 trillion of U.S. Treasury bonds were held by foreign governments, with Japan holding the most, followed by China.Mutual funds in the United States hold $4.9 trillion in U.S. Treasury securities, while the rest of the American public holds $3.1 trillion in Treasury securities.

U.S. banks and pension funds hold $2.2 trillion and $2.0 trillion in Treasury securities, respectively.

The last time U.S. debt faced a large-scale sell-off was in 1995, five years before the internet bubble, when Federal Reserve Chairman Greenspan led the U.S. economy through a soft landing.

Wall Street investment banks and relevant U.S. government departments all bet on the internet revolution to save the U.S. economy on the brink of recession.

Nasdaq Trend from 1995 to 2003

The Nasdaq index soared to 5,132 points, and then the internet bubble burst, plunging the United States into a severe recession.

The current situation is not exactly the same as it was then, but there is a certain path dependence.

For example, the AI revolution is currently unfolding vigorously in the U.S. stock market, with the Nasdaq index and the seven giants of the U.S. stock market continuously rising. However, the real economy and manufacturing are flowing out of the United States.

Inflation has not been alleviated by interest rate hikes, but a reduction in interest rates will inevitably trigger a second round of inflation, so U.S. monetary policy is hesitating between lowering rates and not lowering rates.

At this time, if China continues to choose to follow Wall Street investment banks in selling U.S. Treasury securities, it would undoubtedly be a fatal blow to U.S. debt.However, at this juncture, we observe that the U.S. Treasury Department has been frequently communicating with our country's relevant departments. Moreover, on September 25th, the China-U.S. Economic Working Group held its sixth meeting, and following the meeting, U.S. Treasury Secretary Janet Yellen had a separate exchange with our country's Deputy Minister of Finance.

From this perspective, it is evident that the United States heavily relies on China's assistance, whether in fiscal or monetary policy.

What measures will China take?

During this period, the United States has been closely monitoring the monetary and fiscal policies that China will adopt to stimulate its economy. They have also been probing in various ways, using their media advantage to spread the narrative that China will release a monetary stimulus policy of over 10 trillion yuan, although this has not been confirmed by relevant Chinese departments. Nevertheless, it has substantially influenced international investment banks' bets on future exchange rate trends.

What does China printing 10 trillion yuan signify?

If China prints 10 trillion yuan without considering any exchange rate consequences, it signifies that the offshore yuan exchange rate would rapidly depreciate. An enormous amount of currency would quickly continue to inflate China's asset prices. However, a significant portion of the money would also flow into risk-free U.S. Treasury bonds.

This is similar to what happened in 2008 when China implemented a 4 trillion yuan economic stimulus plan, ultimately using a large amount of surplus currency to purchase U.S. Treasury bonds.

But this time, China really will not release excessive monetary stimulus policies. Up to now, there has been no quantitative figure released regarding China's economic stimulus. Even on October 25th, the Chinese Ministry of Finance delegation attending the World Bank and International Monetary Fund annual meeting stated that in order to achieve China's 5% economic target, the scale of policy stimulus this year is quite substantial.But as for the scale of this rather large amount, whether it's one trillion or ten trillion? No one can say for sure.

If China's economic stimulus policy is not announced in advance, it poses a significant uncertain risk for the Federal Reserve and the United States.

Should the Federal Reserve continue to lower interest rates by 25 basis points in the coming November, and if the People's Bank of China correspondingly releases one trillion in liquidity, it would result in a depreciation of the dollar and an appreciation of the yuan in the international foreign exchange market.

This market scenario of a weak dollar and a strong yuan is not what the United States wants to see; they prefer China to release a larger monetary or fiscal policy all at once, making it easier for them to control the exchange rate market.

In other words, the United States simply does not want to lose so badly in this round.