February 25, 2018

Main » Report buying of US debt might stop is 'fake news'

Report buying of US debt might stop is 'fake news'

13 January 2018

It is true that China is one of the biggest external holders of USA treasuries, along with Japan, which means that they do have enormous influence over how the market can and does move. It said investments in Treasuries are decided by market conditions.

In order for bond yields to move higher, bond prices would have to fall as the "coupon" interest payment is fixed at the point when new bonds are issued and can not be changed to compensate for higher (better) base rates. Weeks later, China's top foreign-exchange official said the nation would keep buying Treasuries.

"China is the largest single foreign holder of United States debt, but their incremental changes tend to be small relative to other flows in the market and in recent years some periods where holdings have fallen correspond with risk-off moves that see yields move lower, sometimes helped by fears over China growth", he said.

Dan Ivascyn, the group chief investment officer at Pacific Investment Management Co, told Reuters on Wednesday he would consider adding U.S. Treasuries to the firm's portfolios if the bond market weakens further.

Its demand for foreign currency holdings has, over the years, been a key pillar of support for the US Dollar and made a big contribution to keeping US government borrowing costs as low as they have been. The benchmark 10-year yield touched 2.597 percent, its loftiest level since March, according to Reuters data.

Investors started 2018 with high hopes for strong US earnings growth.

The dollar has been struggling to gain traction in the opening days of 2018 after losing around 10 percent against a basket of currencies previous year as economic growth elsewhere, notably Europe, overtook the U.S. "It's been this symbiotic relationship for the past 15 years or so".

"To date, US inflation pressures have remain muted".

Fears that China may slow or even halt purchases of U.S. Treasuries resurfaced this week, the latest in a series of events foretold by some to bring world bond markets crashing to the canvas.

The BOJ maintained the amount of its bond purchases on Thursday, helping to soothe a market rattled by its reduction earlier this week. After the Wen remarks, made at the close of the annual gathering of China's legislature, President Barack Obama assured America's creditors that US government debt was safe and the nation's finances were sound.

China has the world's biggest foreign reserves of about US$3.1 trillion by December, which rose slightly in 2017 because of a 6.7 per cent appreciation of the Chinese currency.

China continued to express concerns about its holdings that year, however, prompting Treasury Secretary Timothy Geithner in July to pledge his government would ensure a "sustainable" budget deficit by 2013.

There were also reports out of Canada that officials there were increasingly concerned that the US will pull out of NAFTA, and while the report was quickly denied by both sides the market reaction suggests that there is rising nervousness about the prospect of increased barriers to trade by the US President.

There are signs that the adjustment the Chinese officials recommended may already be happening.

"It's certainly more of a hawkish tilt in the minutes", said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto. "But people are nervous about the Treasury market at the moment with a global pickup in growth". If it were to dump Treasuries, German bunds could be a destination, though yields there are rising too, he said.

On Wall Street, the banking sector surged, led by shares in JPMorgan and Wells Fargo. The yuan gained around 6.8 percent versus the dollar past year.

The treasury yields (return on investment) rise when bond prices fall, and so when the markets took a tumble on Wednesday, the yields moved to their highest level since March 15 a year ago, marking a 2.597 per cent return.

"Their holdings have moved up and down through time", he said.

Report buying of US debt might stop is 'fake news'