Is China halting US Treasury purchases?

Posted January 13, 2018

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.

Inflation pressures have the capacity to prompt the Federal Reserve to drive the U.S. base rate higher, which would mean market interest rates (bond yields) also have to move higher. At 9:30 a.m. ET (1330 GMT), 10-year yields were 2.559 percent, down from the high of 2.597 percent hit Wednesday, the highest level since March 15.

In the past two weeks, two of China's star companies, Ant Financial and Huawei, have met setbacks in the U.S. market where their investments were being obstructed, triggering a wave of mainland Chinese state media criticisms against the USA government for its "protectionism".

There's that. And then there's also the central bank's counter-measures should bond yields continue to rise amid low inflation - knowing that it had worked in the past, central banks would have no misgiving about reinstating bond buying.

"Market reaction to dollar-buying factors has been subdued, while market reactions to dollar-selling, and yen-buying factors, have been more vivid", Murata said.

Overnight, Wall Street closed lower on Wednesday as concerns over China reducing its US Treasury purchases and the US exiting NAFTA offset strong gains in financials.

"The about to issue a whole lot more debt in an environment where the demand for that debt is about to go down", said Daniel W. Drezner, a professor of worldwide politics at the Fletcher School of Law and Diplomacy at Tufts University.

"If the PBOC were to precipitate a large sell-off by retreating from the US Treasury market, the value of its existing reserves would fall".

There may be bond market tremors right now but no quake.

The dollar had slumped as the Bank of Japan's move to trim its purchases of long-dated government bonds (JGB) this week reverberated across currency markets.

The Shanghai composite index was down 0.2 per cent at the close of the ASX.

The MSCI world equity index, which tracks shares in 47 countries, was flat.

On Tuesday, markets were surprised by the BOJ's decision to reduce its purchases of 10 to 25 year JGBs and 25 to 40 JGBs paper by 10 billion yen each, from its previous operations, to 190 billion yen and 80 billion respectively.

But European stock futures were 0.2 percent higher, portending a brighter opening for the region, with DAX futures up 0.1 percent and FTSE futures up 0.2 percent. The tech company's profit guidance disappointed investors and raised worries the memory chip boom may be coming to an end.

Platinum was up 0.9% at 973.60 oz, after hitting a 4-month high at 973.90.

"The rally has been a bit too fast".

Some said China's move served as a warning to the USA administration that it could face higher borrowing costs should it start a trade war with Beijing ahead of the new United States tariff measures expected in the coming weeks. "The boring explanation here is that China just has enough Treasuries in its portfolio", said Brad Setser, an expert in global capital flows at the Council on Foreign Relations.