Dollar regains some poise after China dismisses U.S. bonds report

Janus Henderson's Bill Gross

National Australia Bank strategist Alex Stanley said global demand for US Treasuries was a major risk to watch, "but one should be wary of extrapolating reports on China demand into views that yields are poised for an imminent surge higher".

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

Any reduction in Chinese purchases would come just as the United States prepares to boost its supply of debt.

China's foreign exchange reserves, the world's largest, rose US$129.4 billion in 2017 to US$3.14 trillion, as tight regulations and a strong yuan continued to discourage capital outflows, data from China's central bank showed. "So it could be used as a "one stone killing two birds", which provides the Trump administration with pressure on both the markets and trade fronts", she said. The increase came as the size of the USA debt market more than tripled to $14.5 trillion.

Gross said the days of mid-single digit returns for bond investors are likely over. "I don't think that's worked out so poorly for the U.S".

On Wednesday, Bloomberg, citing unidentified people familiar with the matter, said China found that US bonds were becoming less attractive and that trade tensions with the USA could provide a reason to stop buying American government paper.

Economists say they expect China to continue to adjust its holdings of US government debt, considered to be the most liquid dollar assets, but few believe dumping US Treasuries is among policy choices to be considered by top leaders.


The strategists question the reliability of the report because, if China really were about to stop buying US Treasuries and chose to telegraph it beforehand, then it would hurt itself by driving down the value of the bonds already held on the PBOC's balance sheet. 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.

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 session high for the global benchmark was US$69.37, highest since May 2015.

Treasury prices fell, boosting yields.

BMO suggests buying 10-year Treasuries if yields climb to 2.6%.

In the eyes of some, Chinese officials may be trying to send a message that they have leverage with President Trump talking tough on trade. The consensus among analysts surveyed by Bloomberg is for little change in the yuan by the end of 2018, from its current level of around 6.50 per dollar.

In 2016, China's treasury holding tumbled US$187.7 billion when the country was briefly dethroned by Japan as the top holder of USA government debt, as China's central bank dipped into its reserve to defend the ailing yuan.

The US government uses treasuries (or T-Bonds) to help finance itself.

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