Beijing weighs slowing, halting purchases of US Treasuries

Bloomberg’s Emma O’Brien reports on how China is said to be reviewing its foreign-exchange holdings

Bloomberg’s Emma O’Brien reports on how China is said to be reviewing its foreign-exchange holdings

A foreign media outlet reported Wednesday that China, the biggest buyer of USA sovereign bonds, is considering slowing down or even halting its purchases as US debt is becoming less attractive.

"Senior government officials in China" warned that the country may slow or halt purchases of US Treasuries.

The report comes amid increasing nervousness about bond weakness after the Bank of Japan said on Tuesday it will trim its purchases of Japanese government bonds, raising speculation it will reduce its monetary stimulus this year.

While it is conceivable that China could make some adjustments to its foreign reserve holdings, it seems "highly unlikely" that China will stop buying U.S. Treasuries, said Stephen Innes, head of trading for Oanda in Singapore. It isn't clear whether the officials' recommendations have been adopted.

China, the biggest buyer of US sovereign bonds, could be slowing down or even halting its purchases, according to a report.

"If the reports turn out to be true and China no longer sees Treasuries as an attractive option, the repercussions could be significant", says Craig Erlam, senior market strategist at OANDA, a currency trading firm with offices in NY. "Today's headlines will underscore concerns that the fading global quantitative-easing bid will trigger lasting upside pressure on developed-market yields".

The Canadian dollar nursed its losses, having slipped on Wednesday as worries of a U.S. NAFTA withdrawal tempered bets that the Bank of Canada will raise interest rates next week. Trade tensions between the world's two largest economies was also cited as a possible reason why China is thinking about reducing its US holdings, according to Bloomberg. Specifically, the factors include the outlook for supply of USA government debt, and political developments such as trade disputes between the world's two biggest economies, the people said. Japan was second with USA bond holdings worth $1.09 trillion.

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The Bloomberg report, which cited people familiar with the matter without identifying their seniority or input into the report, quoted the sources as saying the market for USA government bonds is becoming less attractive relative to other assets.

Still, Rjavinski stresses that it is "premature" to think that yields are on the verge of a sharp spike higher and that the multi-decade bull market in bonds is over and a bear market has begun. Instead of just stopping its purchases of USA debt, it could start selling some of the paper it has. "Treasury financing needs are going to rise significantly in 2018 and beyond relative to recent history, so Treasury is going to be looking for as many sources of demand as they can find".

The world's second largest economy has long invested heavily in USA bonds as a way of controlling the value of its own currency the yuan.

"A significant change in policy could put considerable upside pressure on USA yields".

Some investors said that the market could take the China news in stride, considering the nation's net purchases of Treasurys have already slowed "significantly". The scheduled to reopen $20 billion of 10-year debt Wednesday, followed by $12 billion of 30-year bonds Thursday.

Bloomberg News estimates that the Chinese state now holds around US$1.2 trillion in USA debt, an amount that has doubled over the last 10 years.

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