A Sobering Development

Quick: which government’s debt is the more stable investment: U.S. Treasury bonds or the government bonds issued by the communist Chinese regime?

If you had answered in favor of the U.S. any time before early December, you would have been correct. But in recent months, global bond investors have been increasingly pricing in the slowing rate of U.S. economic growth, the U.S. government’s exploding debt, the diminished Treasury revenue caused by the 2017 tax cuts, and the Federal Reserve Board’s promise to raise rates in slow, incremental steps in the future. Also, the dollar depreciated 4.4% since the end of 2016, compared with a basket of 10 leading foreign currencies.

China, meanwhile, has seen its own GDP growth slow, but still reports a 6.9% rate (compared with 2.2% for the U.S. in the past year), and most observers believe China will have the largest economy in the world before long. As you can see from the chart, Chinese 12-month bonds have only very recently offered lower yields than the U.S., and there is no guarantee that the trend—however clear it is on the chart—will continue.

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