23 May 2019
China has the world’s biggest foreign exchange reserves, approximately US$3 trillion, and is the biggest foreign holder of US government debt. Photo: Reuters
China has the world’s biggest foreign exchange reserves, approximately US$3 trillion, and is the biggest foreign holder of US government debt. Photo: Reuters

US Treasury yields surge on report China may slow purchases

Chinese officials reviewing the country’s vast foreign exchange holdings have recommended slowing or halting purchases of US Treasury bonds amid a less attractive market for them and rising US-China trade tensions, Bloomberg News reports.

While it’s not clear whether the talk would lead to any concrete change, the news added to bond investors’ woes as global debt markets were already selling off amid signs that central banks are starting to step back after years of bond-buying stimulus, the report said.

The report sent US Treasury yields to 10-month highs and sent the dollar lower.

Economists cautioned, however, that China would not be able to make large changes to the composition of its reserves as it needs them to manage its renminbi exchange rate, Reuters said.

China has the world’s biggest foreign exchange reserves, approximately US$3 trillion, and is the biggest foreign holder of US government debt, with US$1.19 trillion in Treasuries as of October 2017, according to data from the Treasury Department.

The Bloomberg report, which cited people familiar with the matter without identifying their seniority or input into the report, quoted the sources as saying the market for US government bonds is becoming less attractive relative to other assets. They also cited trade tensions with the United States as a reason to slow Treasury purchases, the report said.

Bloomberg said the Chinese officials did not specify why trade tensions would cause a cutback in Treasuries purchases.

US Treasury Undersecretary David Malpass, speaking to reporters in Brussels, dismissed any concerns about China’s demand for US Treasuries.

“The US Treasury market is a deep, robust market within the world and so we are confident that our economy, with the economy strengthening, that it will remain a deep, robust market,” Malpass said when asked to comment on the report.

Malpass, who heads international affairs for Treasury, also reiterated his concerns about China’s emphasis on its state-owned enterprises and government subsidies that distort capital allocation.

Major US government bond yields extended earlier gains after the report. The yield on 10-year US Treasury hit a 10-month high of 2.59 percent in European trade and was up 4 basis points on the day. That pushed the US dollar to a six-week low against the Japanese yen.

Wall Street’s major indexes pared earlier losses on Wednesday as higher US government bond yields drove gains for banks and other financial stocks.

But some economists noted that China had already eased Treasury holdings and would not be able to more aggressively reduce holdings without hurting its portfolio, given its need for stable and liquid dollar assets, Reuters said.

“There aren’t many places you can stick that money,” said Paul Ashworth, an economist at Capital Economics in Toronto.

China is so heavily invested in US public debt that it has an interest in keeping the market healthy, Bloomberg quoted Nathan Sheets, chief economist for PGIM Fixed Income, as saying.

“If China were to do something that created uncertainties in the government securities markets, China is a major foreign holder of US Treasuries, so it’s deeply invested in that market” and wouldn’t want to make any moves that could hurt its own position, said Sheets, who served as Treasury undersecretary for international affairs in the administration of former President Barack Obama.

China uses its holdings of foreign currency bonds to keep its currency at the rate where it wants it, and given this desire for stability, there might not be much room for maneuver on the composition of its reserves, Reuters said.

But Ashworth noted that the move could serve as a warning that China could quickly shift US borrowing costs higher if the Trump administration started a trade war with Beijing.

The administration is considering several new tariff moves in the coming weeks, including broad restrictions on steel and aluminum imports and punitive actions against China arising from an investigation into Beijing’s intellectual property practices.

The report comes amid increasing nervousness about bond weakness after the Bank of Japan said on Tuesday it will trim its purchases of Japanese government bonds, raising speculation it will reduce its monetary stimulus this year.

“People were already jittery about Treasuries,” said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York, noting the Chinese news is “piling on”.

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