China may stop buying US Treasury bonds

A broker looks at a graph on his computer screen on the dealing floor at ICAP in London

China may stop buying US Treasury bonds

Officials reviewing China's foreign-exchange holdings have recommended slowing or halting purchases of US government bonds, Bloomberg News reported, citing people familiar with the matter. Calm was restored after China's state foreign exchange regulator said it could be "fake" news.

So if it truly is curtains for the bond bull market, how long will the bear period last?

Benchmark 10-year notes US10YT=RR last rose 4/32 in price to yield 2.5367 percent, from 2.549 percent late on Wednesday.

Bitcoin prices tumbled Thursday, as a top official from South Korea said the government is preparing a bill to ban the trading of cryptocurrencies on exchanges.

China owned at least $1.2 trillion of Treasury debt as of October, according to US government data.

The powerful rally in global stocks since the year began is facing a headwind as bond yields climb, the flip side of prospects for continued synchronous global growth and the potential for a pick-up in inflation pressures.

The report sent 10-year US Treasury yields to a 10-month high of 2.59 per cent and the dollar index lower to 92.3 on Wednesday night.

US 10-Year Treasury yields rose to fresh 10-month highs following the report.

Against a basket of currencies, the dollar was down 0.15 percent.

Why does China own $1.2 trillion of Treasuries in the first place?

Benchmark yields in the United States rose for the fifth day after officials in China reviewing the nation's foreign-exchange holdings were said to have recommended slowing or halting purchases of Treasuries. "It's been this symbiotic relationship for the past 15 years or so". However, we believe USA inflation pressures are picking up.

It is not clear if the recommendations of the review have been adopted.

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We wouldn't buy Treasuries (or other sovereign bonds) just now. However, market participants suggested it would take time to verify any slowdown in Chinese purchases of U.S. Treasurys as new data emerges in the coming months.

Beijing keeps a big share of its USD3.1 trillion in foreign currency reserves in Treasury debt, which is considered safe and easy to trade.

China continued to express concerns about its holdings that year, however, prompting Treasury Secretary Timothy Geithner in July to pledge his government would ensure a "sustainable" budget deficit by 2013.

Nonetheless, China's position as a major purchaser of Treasuries gives it some leverage to try to shape US responses - including the Trump administration's tough talk on trade policy.

China has the world's largest currency reserves, approximately $US3 trillion.

There are signs that the adjustment the Chinese officials recommended may already be happening. Indirect bidders-a proxy for foreign investors and central banks-snapped up 71.5% of the auction.

Analysts believe this might be a veiled threat from China to President Donald Trump. "That doesn't mean that it is". The Federal Reserve and other central banks may be winding down their quantitative easing programmes but private sector buyers are ready to step in. The S&P 500's near 2.5 percent dividend yield is far more tempting to investors than real Treasury yields of around zero or even lower.

While a strategist from Jeffries isn't so sure about minimal impact, "If China stops buying Treasuries, the market could suffer".

The team at Capital Economics isn't that anxious, however, noting that China's holdings of Treasury bonds have remained more or less stable in recent years and that any shift away would risk lowering the value of their own holdings.

"The authenticity of the report is somewhat questionable given the nature of such information getting into the public domain would not be in the interest of either SAFE, or the PBoC", say Richard Grace and Elias Haddad, chief currency strategist and senior currency strategist respectively at Commonwealth Bank of Australia.

Of course, regardless of the eventual reason behind such a move, the idea that China's holdings of USA bonds won't still shrink coud turn out to be wrong.

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