Published: Thu, January 11, 2018
Markets | By Rosalie Gross

Dollar up vs yen as concerns ease over China US bond stance

Dollar up vs yen as concerns ease over China US bond stance

A foreign media outlet reported Wednesday that China, the biggest buyer of USA sovereign bonds, is considering slowing down or even halting its purchases as US debt is becoming less attractive.

China is diversifying its foreign exchange reserves in order to safeguard their value, the country's currency regulator said on Thursday, while dismissing a media report the government is halting or reducing its purchases of USA debt.

The dollar is down more than 1.1 percent against the yen so far this week, having also come under pressure after the Bank of Japan trimmed its buying of long-dated Japanese government bonds in market operations on Tuesday.

USA 10-year Treasury yields rose to 10-month highs and the dollar fell after the report was published. It isn't clear whether the officials' recommendations have been adopted.

China denied on Thursday a report that it may slow or cease its purchases of US Treasury bonds, calling it a possible case of "fake news" after the dollar tumbled following the story.

"People were already jittery about Treasuries", said Aaron Kohli, an interest rate strategist at BMO Capital Markets in NY, noting the Chinese news is "piling on". "Today's headlines will underscore concerns that the fading global quantitative-easing bid will trigger lasting upside pressure on developed-market yields".

U.S. Dollar and China Yuan notes are seen in this picture illustration June 2, 2017.

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Is China really thinking of slowing or halting bond sales? Specifically, the factors include the outlook for supply of US government debt, and political developments such as trade disputes between the world's two biggest economies, the people said.

"The U.S. 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", Under Secretary for International Affairs David Malpass told a group of reporters in Brussels.

The market rallied to $1328.60 on Wednesday in reaction to the steep drop in the U.S. Dollar.

Still, Rjavinski stresses that it is "premature" to think that yields are on the verge of a sharp spike higher and that the multi-decade bull market in bonds is over and a bear market has begun. For China, trade tensions with the United States may also provide a reason to slow or stop buying American debt. The Treasury Department said in its most recent quarterly refunding announcement in November that borrowing needs will increase as the Federal Reserve reduces its balance sheet and as fiscal deficits look set to widen.

Officials at China's State Administration of Foreign Exchange also recognized that injecting politics into Treasury purchases could backfire, causing a price decline that could damage the value of the country's own holdings, the analysts said.

Markets are also braced for a deluge of debt supply this week.

Bloomberg News estimates that the Chinese state now holds around US$1.2 trillion in U.S. debt, an amount that has doubled over the last 10 years.

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