Bond traders are congenitally anxious people. This derives from the very nature of bond investing: Once you lend someone money, the only acceptable outcome is you will get paid in full on both the coupons and the principal. Anything else is bad.
In addition to outright default in the corporate and municipal markets, you have to worry about currency risks for international bonds, inflation risk everywhere, interest rate risk, and the gnawing sense that someone, somewhere, is going to wake up in the morning and say, “Sell!”
Never mind the old joke that if you owe someone $10 and cannot pay, you have a problem, but if you owe $10 million and cannot pay, they have a problem.
A rational person understands some simple verities of international finance. These include the equivalence between the U.S. current accountdeficit and the U.S. capital account surplus. The dollars being paid by Americans to overseas suppliers are claims on U.S. goods and services and therefore eventually have to be reinvested in the U.S. And they include the role of the U.S. capital surplus in maintaining the export industries of our suppliers. Bluntly, if someone in Tokyo or Beijing or Taipei woke up one morning and decided to liquidate their country’s portfolio of U.S. Treasuries, who would be hurt more, them or the U.S.?
But answering irrational fears with rational arguments is a losing proposition. For more than 30 years, bond traders have searched the skies for an incoming wave of Japanese bond sellers attacking out of the rising sun. How foolish:
Even if the Japanese sell, other holders of dollars are forced to buy because of the current account capital account situation. The Japanese have actually been net sellers of U.S. Treasuries several times, including in early 2006, without consequence. With some minor exceptions in late 2001 and early 2002, other foreign investors have been net buyers each time this happened.
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