US Treasuries slide as China said to view them as 'less attractive'

Alicia Cross
January 14, 2018

Bloomberg News reported Wednesday, citing people familiar with the matter, that officials in Beijing have recommended the Chinese government lower - or even stop - its buying of US sovereign debt.

China added to bond investors' jitters on Wednesday as traders braced for what they feared could be the end of a three-decade bull market.

Benchmark 10-year notes last rose 4/32 in price to yield 2.5367 percent, from 2.549 percent late on Wednesday. The market was already wary of a pick-up in bond supply this year as the US Treasury finances Trump's tax plan and the Fed reduces its purchases.

Yep, that's right; China's foreign exchange regulator said Thursday that the report in question may not be accurate. The Bloomberg News report had lifted yields on the 10-year government bond to a 10-month high on Wednesday.

China has been diversifying its foreign currency reserves investments to help "safeguard the overall safety of foreign exchange assets and preserve and increase their value", the SAFE said.

In order for bond yields to move higher, bond prices would have to fall as the "coupon" interest payment is fixed at the point when new bonds are issued and can not be changed to compensate for higher (better) base rates.

The regulator added that forex reserves management agencies are responsible investors in global financial markets.

Bill Gross, nicknamed the "bond king" during his time at U.S. investor Pimco, said late last night that his Janus Henderson fund is now shorting government bonds, and that bonds had entered a "bear market". "We think this story could be quoting a mistaken source or it could also be a piece of fake news".

"We've noticed recently that protectionist voices have been rising in the US", China's Ministry of Commerce spokesman Gao Feng said at a regular news briefing.

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The $14 trillion Treasury market has been roiled in the past 48 hours.

The strategists question the reliability of the report because, if China really were about to stop buying US Treasuries and chose to telegraph it beforehand, then it would hurt itself by driving down the value of the bonds already held on the PBOC's balance sheet. Higher interest rates in the eurozone can attract money managers at the expense of U.S. Treasurys, which may see outflows.

The exact composition of China's reserves is a state secret and the subject of intense scrutiny by global investors.

Financial stocks were still the biggest percentage gainers by late afternoon, however, as investors reacted to the Bloomberg report on China, the world's biggest holder of US Treasuries.

On the US economic front, the Labor Department released a report showing import prices rose by much less than expected in the month of December.

Shares of Lennar Corp gained 2 percent as No.2 U.S. homebuilder's orders and total revenue rose more than expected in the fourth quarter.

USA inflation data for December are due on Friday morning, with traders closely watching for hints (http://www.marketwatch.com/story/why-us-inflation-data-will-be-a-litmus-test-for-bond-buyers-2018-01-09) that consumer prices are picking up at a faster pace that could speed up the Federal Reserve's expected rate increases.

There were similar concerns around 11 months ago when China reduced its holdings of U.S. government debt in 2016 while it was trying to manage capital flight by intervening in the FX markets to support the Renminbi.

Other reports by Free-Prsite

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