China may stop buying US Treasury bonds

Janus Henderson's Bill Gross

Janus Henderson's Bill Gross

X Ten-year USA yields flirted with the highest levels since 2014 Wednesday as longtime pillars of support for the world's biggest bond market showed signs of eroding, raising the specter of even deeper losses.

Some investors said that the market could take the China news in its stride considering the nation's net purchases of Treasuries have already slowed "significantly".

Bloomberg, citing unidentified sources, reported Chinese authorities were considering slowing or halting purchases of Treasuries and said they might cite trade tensions as a reason. "We have said many times in the past that these auctions are viewed as liquidity opportunities and today is no different", said Thomas Simons, senior money market economist at Jefferies.

Beijing keeps a big share of its $3.1 trillion in foreign currency reserves in US Treasury debt, which is considered safe and easy to trade.

And while 2018 has brought some telegraphed risks into sharper focus, nothing has rocked the foundation of the $14.5 trillion Treasuries market, said Aaron Kohli, an interest-rate strategist at BMO Capital Markets in NY. "It's challenging to find any real substantial alternatives", with China earning dollars - the flip side of the US current account deficit.

Market sentiment seems tilted toward the dollar's downside, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo. "I don't think that's worked out so poorly for the U.S".

The report also notes that Chinese officials think US debt is becoming less attractive compared with other assets, adding that trade tensions between the two countries could provide a reason to slow down or halt the purchases.

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

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

Australian 10-year bonds rose 2.1 points to 2.74 per cent.

Yields rise when bond prices fall.

Some market experts speculate that China might want to send a message to President Trump over trade.

But any attempts to use that power could hurt the dollar, damaging China's own United States holdings. Earlier in the day, he told Bloomberg News that the unconstrained fund is short the bond market.

The rising yields led Bill Gross of Janus Henderson, whose renown as a bond investor came to define the multidecade bull market for fixed-income securities, to pronounce the start of a bear market for bonds, although he said on Wednesday that he did not foresee drastic losses.