Published: Sun, January 14, 2018
Global News | By Stacy Ballard

Is China halting US Treasury purchases?

Is China halting US Treasury purchases?

Markets took a turn south following a report suggesting the Chinese authorities now view U.S. government bonds as weak.

Officials at China's State Administration of Foreign Exchange also recognized that injecting politics into Treasury purchases could backfire, causing a price decline that could damage the value of the country's own holdings, the analysts said.

"US Treasuries are often used during the political ping-pong match when trade tensions escalate", said Stephen Innes, head of trading for OANDA in the Asia Pacific.

China's foreign exchange reserves - the world's largest - rose to US$3.14tn in December.

The speculation that China may reduce its buying in US bonds helped to underpin the euro, the most obvious alternative to the dollar for assets.

On Tuesday, Bill Gross, the high-profile fixed-income investor, tweeted: "Bond bear market confirmed today".

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On Wednesday, Bloomberg News reported that officials in China, the largest foreign holder of USA government debt, had recommended the country slow down or halt its purchases of the bonds amid a less attractive market for them and rising U.S.

In reality, Yao said Beijing did not have much of a choice but to continue to allocate a large portion of its reserves in USA bonds, given the market's strength in "liquidity and depth".

"We think it is either a quote from some wrong sources, or a piece of fake news", a SAFE spokesperson said in the statement (link in Chinese).

"It's certainly more of a hawkish tilt in the minutes", said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto.

The dollar had been on the back foot even before the news report as the Bank of Japan's move to trim its purchases of long-dated government bonds (JGB) this week reverberated across currency markets.

"The about to issue a whole lot more debt in an environment where the demand for that debt is about to go down", said Daniel W. Drezner, a professor of global politics at the Fletcher School of Law and Diplomacy at Tufts University.

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All told, the three central banks are sitting on $14 trillion in securities they have bought since 2009: a $4.4 trillion mix of Treasuries and mortgage securities held by the Federal Reserve; the European Central Bank's $5 trillion in corporate and government bonds; and $4.5 trillion worth of bonds and exchange traded funds accumulated by the Bank of Japan. "But that correlation has broken apart fantastically over the last couple of days", he said.

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.

Investors worry that if China purchases fewer Treasuries, the USA government will have to find alternative buyers. It isn't clear whether the recommendations of the officials have been adopted, Livemint reported.

China uses its holdings of foreign currency bonds to keep its currency at the rate where it wants it, and given this desire for stability, there might not be much room for maneuver on the composition of its reserves, Reuters said.

Treasury prices fell, boosting yields.

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