Gold Up on Report China May Slow US Treasury Buys

Sunday, 14 Jan, 2018

Chinese officials responsible for reviewing the country's enormous foreign exchange reserves have recommended either slowing or stopping purchases of US Treasury bonds, Reuters reports via Bloomberg News.

Coming into this year, strategists at Wells Fargo and some other banks were expecting China's Treasuries buying to ebb as they predicted stability in the yuan after a 2017 rally.

Concern that China, the world's biggest holder of US Treasury bonds, could curb or stop buying government bonds, also pushed the dollar to a more than six-week low against the Japanese yen.

The officials recommended that the nation closely watch factors such as the outlook for supply of U.S. government debt, along with political developments including trade disputes between the world's two biggest economies when deciding whether to cut some Treasury holdings, the people said.

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

Bloomberg, citing unidentified sources, reported Chinese authorities were considering slowing or halting purchases of Treasuries and said they might cite trade tensions as a reason.

The 10-year note yielded 2.56% at about 2 NY, little changed on the session and down from as high as 2.595% earlier.

"The flush of money is being met by a flush of supply, and that produces higher rates", he said, noting that central banks have injected $14 trillion of liquidity into the market over the past five years.

"Like other assets, China's investment in U.S. Treasurys is market-driven and is managed professionally based on investment demand and market conditions", the SAFE said.

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

"All of last year there was this fantastic correlation between US 10-year yields and dollar-yen and people put on what is known as pairs trades", said Greg Anderson, global head of FX strategy at BMO Capital Markets in NY. "It is possible too that China wants to signal to its people that it will not keep financing the US when the not treating China with respect", Mr. Setser said. "That's not helpful to a bond market that's already under pressure".

Any reduction in Chinese purchases would come just as the USA prepares to boost its supply of debt. That's just how markets work.

Reports of Chinese caution over USA debt could affect the bond yield curve and investor sentiment, and the doubts caused by the speculation contributed to falls on Wall Street overnight. The session high for the global benchmark was US$69.37, highest since May 2015.

The tightening effect of such measures would likely have an impact on how many times the Fed raises interest rates this year, which is why we've seen a corresponding drop in the dollar.