I don't understand this "someone is dumping bonds" narrative. Maybe I'm missing something, but the spike in treasury yields is exactly what economic theory predicts must happen. Has business and financial journalism decided that economics is no longer a prerequisite for those jobs? Here's standard economic theory:
1. trade deficits and capital surpluses are two sides to the same coin. They are literally indistinguishable. When we buy goods from China, they end up with dollars. If they sell their dollars, it plunges the US currency and that's not what China wants. So China uses the dollars to buy US debt (it's sort of like America collectively buys shit from China with installment payments). And that's good, because we have a lot of debt to sell! In fact, there's really no way we would sell our debt without China's involvement.
2. A persistent story in economics -- one that has been fuzzed up a bit in the last two decades but has not been altered in its basics, I don't think -- is that budget deficits create trade deficits. Again, it can't work differently: what is China going to do with all those dollars? It will either sell them, weakening our currency (in which case we will have even more trouble attracting foreign capital, because our yields have to be higher to be competitive), or invest them in treasuries.
3. So the House/Senate this week seem to have agreed on a budget framework that would increase the US debt by a lot. Thus, we are increasing our financing needs by a considerable amount (in part because Trump and the GOP are trying to reduce the financing provided by taxing rich people). But where is that going to come from?
4. The problem is that our trade deficit with China is going to drop close to zero for a little while. That's because trade between the two countries will drop to zero. Normally, the way the trade deficit would close to zero would be dollar depreciation. And that would come from the decreased supply of US debt to purchase. So the process will find an equilibrium.
But today trade is dropping because Trump has more or less decided to make it illegal. That's not supposed to happen in the standard story. So if China no longer has dollars because it's no longer running a trade surplus, they won't buy Treasuries.
In other words, the US government created a $2T financing hole from the increased debt, at the same time it's cutting off our main buyer of debt. The price of that debt has to increase. It just does.
5. So what I see is economics telling us what will happen inevitably. I mean, maybe there's dumping but this isn't a market reacting out of spite. This is a market acting exactly as one would expect.
6. By the way, usually what happens when the government tries to make something happen that doesn't organically happen, the economy adjusts to make it possible. Huge budget deficits and no trade deficits just isn't a feasible combination at our current production levels. The way it can happen is if the US economy enters a deep recession, so that's likely what would happen. US spending has to fall dramatically to make it work.
Note that some of the drop in spending will come from increased savings. Again, somebody has to finance those deficits. If the world isn't going to, Americans will. That's why rates are rising -- Americans don't want to, and they will keep rising until Americans prefer the return from the bond to immediate consumption. All along, money that Americans invest in Treasuries is money that isn't invested in the actual economy. Hence, recession. And recession means lower tax revenues, which means higher deficits, which means . . .
7. This exact process is how Argentina's economy died in the 1950s. One of the more pernicious effects of this economic policy is a decline in private sector investment. Again, it's necessary. So infrastructure crumbles, innovation locates elsewhere, long-term growth stalls. To finance the increasing deficits, the government turns to asset sales (a DOGE specialty), which makes the long-term revenue situation worse.
