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China may stop buying US Treasury bonds

14 January 2018

Officials at the agency that manages China foreign reserves on Thursday issued a statement that media reports about suspending purchases of Treasuries "may quote the wrong source of information, or may be fake information".

Beijing is the biggest holder of US debt and the Bloomberg report was seen by some as a veiled threat to US President Donald Trump following his tough talk on global trade and China's "unfair trade practices".

Spot gold was up 0.1 percent at $1,317.76 an ounce after spiking to almost four-month highs in the previous session, in line with the dollar's plunge.

Benchmark 10-year notes US10YT=RR last rose 4/32 in price to yield 2.5367 percent, from 2.549 percent late on Wednesday.

That marked a turnaround after China burnt through almost US$320 billion in 2016 to defend the yuan, which fell 6.5 percent against the surging dollar.

The regulator added that forex reserves management agencies are responsible investors in global financial markets. "It is clear that the recent spike in yields brought out demand and Treasuries are rallying in response", wrote Peter Boockvar, chief investment officer for the Bleakley Financial Group. Trump is facing decision time as deadlines approach over whether to slap tariffs on imports from steel and aluminum to solar panels, which would be clearly aimed at China.

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

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

A forthcoming decision from Washington over whether to impose sanctions against China for its trade practices and alleged failure to enforce worldwide sanctions against North Korea may also have been at play. Estimates say China now holds around $1.2 trillion (€1.0 trillion) in USA debt, an amount that has doubled over the past 10 years.

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Benchmark yields in the United States rose for the fifth day after officials in China reviewing the nation's foreign-exchange holdings were said to have recommended slowing or halting purchases of Treasuries.

Other experts dismiss the idea that China would use bonds to play politics.

Yet there are rising concerns that, with central banks moving towards tighter monetary policy, the good times are now coming to an end.

A shrinking pile of overall foreign exchange reserves could mean lower demand for U.S. bonds. Indirect bidders-a proxy for foreign investors and central banks-snapped up 71.5% of the auction.

Trading after the China news shows investors didn't exactly storm the exits. What's more, the Federal Reserve plans to keep hiking rates with a growing economy near full employment. Benchmark U.S. crude was up 43 cents to $64.00 per barrel on the New York Mercantile Exchange.

But why does China hold so much U.S. debt? The Bloomberg News report had lifted yields on the 10-year government bond to a 10-month high on Wednesday. A steady exchange rate suggests limited pressure on Chinese authorities to add Treasuries as part of intervening in currency markets. That's just how markets work.

Yields fall as prices rise.

The Canadian dollar weakened to its lowest level this year, before recovering, as worries of a USA withdrawal from the North American Free Trade Agreement moderated bets that the Bank of Canada will raise interest rates next week.

China may stop buying US Treasury bonds