Markets were closed in the US today for Labor Day weekend, but action internationally may point at least some direction for US Treasuries in particular.

To begin with, there was further erratic and volatile action in China, as markets opened in Shanghai broadly higher, only to crash again about 3.5% on China’s S&P 500 equivalent, the CSI 300 index (00300.SS). This comes along with news that China’s central bank, the PBOC, has dumped a record $93.9B in US treasuries in a single month in an attempt to support its currency, the Yuan.

China has had record outflows of US treasury securities over the last year, with net outflows in 12 of the last 14 months, the longest sustained outflow since China’s stockpiling of US treasuries began. In order to stabilize its exchange rate against the dollar without directly affecting its money supply, this seems to be the logical move if China wants the Yuan to resist a freefall after the triple devaluation last month.

The implications for US bonds (NYSEARCA:BND) is the question, since China’s collapsing stock market could force the PBOC to keep stabilizing exchange rates, which means further liquidation of US Treasuries and further upward pressure on interest rates. Since the unemployment rate came in below the Federal Reserve’s target rate of 5.2% last week, a rate it has pinned as “full employment”, the combination of a record Chinese bond dump plus a possible rate hike on September 17th could mean excessive upward pressure on bond yields and interest rates it the coming weeks to months.

Goldman Sachs (NYSE:GS) on the other hand, is predicting that a rate hike will not happen next week, and that the Fed will continue “sitting on its hands“. Regardless, the massive liquidation of Treasuries from the largest foreign holder in the world could have the effect of pushing interest rates higher no matter what the Fed does or doesn’t do next week.

The current cycle seems to be the following: The lower Chinese equities go, the lower the Yuan goes. The lower the Yuan goes, the more treasuries the PBOC has to sell in order to support it. And the more treasuries the PBOC sells, the higher interest rates go.

In a manner of speaking then, long term US interest rates may be more dependent on the action in Chinese equity markets than on the upcoming Federal Open Market Committee meeting on September 15-17.