The deepening of President Donald Trump‘s trade war with China could push the country—the second-largest holder of U.S. debt—to dump its Treasury holdings, sending mortgage rates skyrocketing for millions of Americans.
While some experts believe that such an escalation is unlikely to happen, China’s President Xi Jinping has promised to “fight” the Trump administration’s escalation of tariffs “to the end”—and there is a chance he might do so through a very dangerous weapon the country has in its arsenal: more than $760 billion in holdings in U.S. Treasury securities.
Why It Matters
While backing away from other levies on individual countries beyond the 10 percent baseline tariff on all imports to the United States announced earlier this month, Trump has imposed 145 percent tariffs on Chinese goods. China has retaliated with its own 125 percent tariffs on imported American goods.
As tensions grow between the two nations over a budding trade war that has no apparent easy way out, some experts have raised concerns that Beijing may be better equipped to withstand the negative economic shocks caused by the tariffs—and may even be willing to use its Treasury holdings to strike back at Washington and weaken its opponent.
Photo-illustration by Newsweek/Getty
What To Know
Just weeks ago, the 10-year yield rose by 50 basis points to 4.49 percent, the biggest weekly jump since 2001. This happens when someone sells bonds—lots of them, in this case.
While it is not known precisely where the spike in activity came from, its timing suggests that Beijing may have been behind it.
China is the U.S.’ second-largest foreign creditor after Japan. About a decade ago, China used to hold even more U.S. debt, at over $1.3 trillion. As of early 2025, it is estimated to have about $760 billion. Considering the ongoing trade war with the U.S., it is hard to predict what it could now do with them.
“China seems willing to sell U.S. treasuries, even if it means absorbing capital losses,” Olivier Blanchard, the Robert M. Solow Professor of Economics emeritus at MIT, wrote in a post on X (formerly Twitter) on April 10.
“And it looks like it does not take a lot to increase the 10-year rate by quite a bit. Given this, doubling down on U.S. tariffs on Chinese imports does not feel like a winning strategy,” he added.
“Given its political regime, in a game of chicken, the Chinese autocracy can absorb bad news for longer than can the Trump administration,” Blanchard said.
“There has always been the possibility that China or any other foreign nation could sell their treasury holdings. If there is a large sale, that could depress prices and increase yields,” Melissa Cohn, regional vice president of William Raveis Mortgage, told Newsweek.
“In a trade war, the use of treasury selling could happen. In fact, there are people who have said that the recent run-up in yields is due in part to foreign sellers,” she said. “There have been big movements in bonds overnight recently when the China market is open, and ours is closed, suggesting that China is selling U.S. treasuries.”
According to Sina Golara, an assistant professor of supply chain and operations management at Georgia State University’s Robinson College of Business, “the risk of a sudden, large-scale sell-off remains low, as such a move would damage China’s own financial interests by devaluing its remaining holdings and destabilizing global currency markets.”
But Beijing could still use the threat of a treasury sale “as a bargaining chip,” Golara told Newsweek. “The broader risk lies in this gradual shift away from U.S. Treasuries, which could unfold quietly but with far-reaching consequences.”
“There is already empirical evidence for this with the reduced holding of the treasuries and shift to other assets. Recent trends show China reallocating reserves into gold and other non-dollar assets, signaling a long-term diversification strategy, “he said.
Steve H. Hanke, a professor of applied economics at Johns Hopkins University, told Newsweek that the risk of China weaponizing its U.S. Treasury holdings is “overhyped and overblown.” The real risk of weaponization, he said, “is in the United States’ hands—the United States Treasury could simply decide to cancel China’s debt holdings, although this would have drastic consequences for the Treasury market, broader financial markets and the U.S. economy.”
What Would Be the Consequences of a Treasuries Sell-Off by China?
A China-led sell-off of U.S. Treasury bonds would have enormous consequences for the global and U.S. domestic markets.
“Treasuries are not just safe assets—they are the foundation of global finance, serving as pristine collateral in lending and trading,” Golara said.
“If China off-loads a significant share of its holdings, Treasury prices would fall, yields would rise and the value of collateral would decline. This could trigger margin calls and forced liquidations across the world, accelerating financial stress and sell-offs,” he explained.
More importantly, Treasuries bonds are the risk-free benchmark in financial asset pricing, Golara said.
“If they are perceived as volatile or politically weaponized, their credibility erodes. As a result, discount rates would rise globally, reducing the present value of future earnings and dragging down asset prices across the board—stocks, real estate, corporate bonds, and more,” he said.
“A loss of confidence in Treasuries could also accelerate global diversification away from dollar assets, putting the U.S. reserve currency status at risk.”
In the U.S., rising Treasury yields would mean higher borrowing costs for the federal government and businesses, tighter financial conditions, and a heavier fiscal burden.
“With about 36 trillion of US government debt outstanding, the interest on the debt weighs heavily on the federal budget,” Golara said. “If bond yields rise, the U.S. could have compounding troubles in paying interest on the debt, leading to larger budget deficits.”
How Would This Impact Mortgage Rates?
Mortgage rates—which closely track the 10-year Treasury yield—would also climb as a result of a possible sell-off of U.S. Treasuries by China, further weakening an already fragile housing market and dampening consumer spending.
“These effects could magnify recessionary pressures,” Golara said.
“Higher yields increase the cost of mortgages and other borrowing where rates are tied to bond yields,” Cohn said.
“That could hurt the real estate market, as higher rates will price out more potential buyers. Real estate values could drop, and all the ancillary services related to real estate will be impacted as well. This is harmful to our economy.”
During his 2024 presidential campaign, Trump promised to bring down mortgage rates, which have remained historically high since the Federal Reserve began its aggressive rate-hiking campaign to combat inflation in 2022. As of April 10, mortgage rates on 30-year fixed home loans averaged 6.62 percent, according to Freddie Mac.
While mortgage rates have been declining recently due to uncertainty surrounding the impact of Trump’s tariffs on the market, an increase linked to the U.S.-China trade war is likely to make the president take a step back.
What Would Happen to China?
For China, a sudden sell-off of U.S. Treasuries would also be extremely costly, increasing the value of its currency and, thus, the cost of Chinese exports even further.
“First, if they do this, this amounts to a capital war, not just a trade war. And they risk fierce retaliation by the U.S.,” Golara said.
“Also a stronger yuan would hurt export competitiveness, reduce the value of its remaining reserves, and introduce instability into its own economy. Ultimately, a Treasury sell-off would inflict mutual economic damage, and turmoil in the broader global system,” he said.
China’s real weapon, Hanke said, “is the uncertainty that [Beijing] can create with its large Treasury holdings. Investors are worried about a ‘sudden Chinese Treasury dump,'” he said.
“However, such a dump could backfire on the People’s Bank of China’s exchange rate management regime, which is a sensitive operation that is enhanced by low volatility. As a result, I think China’s weaponization of its U.S. debt holdings is much ado about nothing.”
The only keys to the exit door from this trade war “are in President Trump’s desk drawer,” added Hanke, who served on President Ronald Reagan’s Council of Economic Advisers.
“At present, it appears that Trump has no intention of abandoning what is probably the dumbest economic policy move of the last century,” he added. “In fact, the last time beggar-thy-neighbor policies were embraced was at the onset of the Great Depression, when Congress passed the Smoot-Hawley Tariff [Act], which crashed the stock market and drove the U.S. into a catastrophic economic plunge.”
