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China says no plan to reduce US Treasury purchases

13 January 2018

China added to jitters on Wednesday as Bloomberg News reported that government officials are discussing whether to slow or halt USA bond purchases as part of a review of its foreign-exchange holdings. Today, the State Administration of Foreign Exchange (SAFE) published a brief note (in Chinese) on its website denying there was any planned change. This helped to hold back gains in global stock markets.

Profit taking contributed to the early weakness on Wall Street after the major averages once again climbed to new record closing highs in the previous session. The Dow jumped 205.60 points or 0.8% to 25,574.73, the Nasdaq advanced 58.21 points or 0.8% to 7,211.78 and the S&P 500 climbed 19.33 points or 0.7% to 2,767.56.

The reporter's question was in response to an article from Bloomberg on Wednesday, citing "people familiar" with "senior officials" review of China's foreign exchange investments.

People familiar with the matter told Bloomberg the officials believe the market for USA government bonds is becoming less attractive relative to other assets.

Selling pressure waned over the course of the session, however, as traders may have been concerned about missing out on any further upside.

The dollar dropped more than half a percent against a basket of currencies, while long-dated Treasury yields hit fresh highs after the Bloomberg report, which said the US bond market was becoming less attractive for Beijing.

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The Labor Department said its producer price index for final demand edged down by 0.1% in December after climbing by 0.4% in November.

A separate report from the Labor Department unexpectedly showed a modest decrease in producer prices in the month of December.

"The futures are indicating a nasty opening as climbing yields awaken investors to a possible meltdown in the government bond market", Peter Cardillo, chief market economist at First Standard Financial in NY, wrote in a client note.

So, how should investors position themselves if we are expecting this kind of price action across the bond market? The NYSE Arca Airline Index surged up by 3.9% to its best closing level in almost six months.

United Continental (UAL) led the sector higher after the airline reported increases in revenue passenger miles and available seat miles in December.

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Southwest is a passenger airline that provides scheduled air transportation in the United States and near-international markets. The rating was downgraded by Buckingham Research on Friday, July 22 to "Neutral". (NYSE:LUV) rating on Friday, September 15.

China says no plan to reduce US Treasury purchases