China weighs slowing or halting purchases of U.S. treasuries

China weighs slowing or halting purchases of U.S. treasuries

"All of last year there was this fantastic correlation between US 10-year yields and dollar-yen and people put on what is known as pairs trades", said Greg Anderson, global head of FX strategy at BMO Capital Markets in NY.

Some investors said that the market could take the China news in its stride considering the nation's net purchases of Treasuries have already slowed "significantly".

Why would China dump USA debt?

The State Administration of Foreign Exchange (SAFE) said on Thursday that the Bloomberg report had "cited a wrong source, or could be fake news".

It remains the world's largest foreign holder of U.S. government debt, according to the U.S. Treasury Department.

And while 2018 has brought some telegraphed risks into sharper focus, nothing has rocked the foundation of the $14.5 trillion Treasuries market, said Aaron Kohli, an interest-rate strategist at BMO Capital Markets in NY. "But that correlation has broken apart fantastically over the last couple of days", he said. "I don't think we're headed for investment Armageddon".

The dollar was weaker below ¥112 in Tokyo trading Thursday after a news report said China is considering slowing or halting its purchases of U.S. Treasury bonds. In short, the U.S. government sells investors their debt at a preferential rate for them, and as part of a risk-free investment for the buyer, in this case, the Chinese government.

Beijing keeps a big share of its $3.1 trillion in foreign currency reserves in Treasury debt, which is considered safe and easy to trade.

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China very deliberately holds $1.2 trillion of USA debt and by doing so makes a relatively risk-free investment, while sending the United States a political message that they have a hold on U.S. life-lines, the flow of money into its veins. "We don't rule out the possibility that Beijing will seek to increase yuan flexibility, but the shift in policy will likely be modest and highly dependent on market conditions".

"If the PBOC were to precipitate a large sell-off by retreating from the US Treasury market, the value of its existing reserve would fall".

Yields slipped and bond prices clawed back their earlier losses after a solid 30-year bond auction.

Some market experts speculate that China might want to send a message to President Trump over trade.

Ivascyn said shorter-dated U.S. Treasuries are "looking more interesting at these levels" and that Pimco "prefers (the) front end" of the U.S. Treasury yield curve.

Coming into this year, strategists at Wells Fargo and some other banks were expecting China's Treasuries buying to ebb as they predicted stability in the yuan after a 2017 rally. The yuan gained around 6.8 percent versus the dollar past year.

Following the market's movement, bond veteran Gross, who is portfolio manager of the Janus Henderson Global Unconstrained Bond and Total Return strategies and a member of the global macro fixed income leadership team, took to Twitter on Tuesday to say "bond bear market confirmed".

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