China: 'We will not halt United States bond purchases'

China: 'We will not halt United States bond purchases'

China: 'We will not halt United States bond purchases'

U.S. Treasury yields fell after China disputed a report that its government officials had recommended the country slow or halt its purchases of the U.S. bonds.

The report fueled concern that China might use its $1.2 trillion Treasury stockpile-the largest of any foreign country-as leverage should U.S. President Donald Trump act on his administration's increasingly confrontational trade rhetoric.

At the time of closing, the yield on the benchmark 10-year Treasury note, which moves inversely to its price, rallied 1-1/2 basis points to 2.89 percent, the yield on 20-year also rose 1-1/2 basis points to 3.36 percent and the yield on short-term 2-year ended flat at 2.00 percent.

The Dow Jones Industrial Average.DJI fell 16.67 points, or 0.07 percent, to 25,369.13, the S&P 500.SPX lost 3.06 points, or 0.11 percent, to 2,748.23 and the Nasdaq Composite.IXIC dropped 10.01 points, or 0.14 percent, to 7,153.57.

Fears are that if China were to make one giant exit from the American bond market then it would result in a sharp fall in the Dollar and a steep rise in government borrowing costs.

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.

Wall Street experienced its first loss-making session this year, over reports of rising US-China tensions.

There is of course a historical precedent of such tactics backfiring on those who employ them.

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The BOJ maintained the amount of its bond purchases on Thursday, helping to soothe a market rattled by its reduction earlier this week.

Investors started 2018 with high hopes for strong USA earnings growth. The debt is becoming less attractive compared with other assets and trade tensions with the USA may provide a reason for the shift, the thinking of the officials goes, according to the people.

"Their holdings have moved up and down through time", he said.

Pimco, one of the world's biggest money managers, sees this week's USA bond market selloff as a buying opportunity and is not ready to call the spike in 10-year Treasury yield to a nine-month high a bear market precursor.

Not only would below-target inflation persuade central banks to go slow on stimulus reduction but the mere sluggishness in inflation is a positive for the bond market.

A shrinking pile of overall foreign exchange reserves could mean lower demand for U.S. bonds. Meanwhile, China has been gradually moving to a more flexible foreign-exchange regime that would allow it to intervene less in the market.

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

"I don't think yesterday's operation is a hint of a policy change". However, we believe USA inflation pressures are picking up.

"It is China. It can not be said they will never sell U.S. Treasurys", said Keiko Onogi, a bond strategist at Daiwa Securities.

The BOJ's move also helped to raise the 10-year USA bond yield above its December high to 2.573 per cent, the highest since March last year, from 2.482 per cent late on Monday. That's just how markets work.

Nearly nine years ago, at a time when yields were already heading higher and the USA was issuing a record amount of debt to finance stimulus measures, then-Premier Wen Jiabao added fuel to the selloff by saying he was "worried" about the safety of the securities.

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