Quick Take: Chinese Regulator Denies Curbing US Treasury Purchases

14 January, 2018, 17:10 | Author: Regina Silva
  • A broker looks at a graph on his computer screen on the dealing floor at ICAP in London

"Consequently, some future selling of USA treasuries may be forthcoming by market participants, including from China, as well as elsewhere, because of inflation pressures", say Grace and Haddad.

Investors worry that if China purchases fewer Treasuries, the US government will have to find alternative buyers.

"It is very unlikely that China would slow its purchases of U.S. Treasuries to warn the Trump administration against aggressive trade measures", said Michael Hirson, a director at political risk consultant Eurasia Group. However, we believe USA inflation pressures are picking up.

"The bear market that I'm talking about is a mild one", Gross said in a Bloomberg Radio interview.

China has the world's biggest foreign reserves of about US$3.1 trillion by December, which rose slightly in 2017 because of a 6.7 per cent appreciation of the Chinese currency. The increase came as the size of the US debt market more than tripled to $14.5 trillion.

But others said short sellers were squeezed out by the sudden downshift in yields prompted them to buy back, or "covering", the securities they had borrowed, juicing the late day rally.

China's foreign exchange regulator challenged the report that it might slow or stop purchases of U.S. Treasury debt due to trade tensions with Washington as "fake news".

The US government bond market has repeatedly defied negative forecasts and last year the 10-year yield hit 2.63 per cent after hopes began circulating that President Donald Trump would turbocharge the US economy.

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The greenback extended losses after data showed USA producer prices fell for the first time in almost 1-1/2 years in December amid declining costs for services. It isn't clear whether the recommendations of the officials have been adopted, Livemint reported.

Beijing keeps a big share of its $3.1 trillion in foreign currency reserves in Treasury debt, which is considered safe and easy to trade.

The stakes may be higher now as tensions with the USA have been building since the election of President Donald Trump, who's been critical of the American trade deficit with China and other countries.

Reports of Chinese caution over United States 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 amount of Treasuries that foreign central banks hold in custody with the Fed and the movement of the yuan point in that direction, in view of some analysts.

China wants its own currency, the yuan, pegged to the dollar. The benchmark 10-year yield touched 2.597 percent, its loftiest level since March, according to Reuters data.

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

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