Economy

Dollar bruised by worries over China's stance on United States bonds

Dollar bruised by worries over China's stance on United States bonds

US bond prices tumbled, boosting the benchmark 10-year Treasuries yield to a 10-month high of 2.597 per cent after Bloomberg reported that China, the biggest foreign holder of US Treasuries, could slow or stop buying government bonds.

In 2016, China's treasury holding tumbled US$187.7 billion when the country was briefly dethroned by Japan as the top holder of United States government debt, as China's central bank dipped into its reserve to defend the ailing yuan. The decision is based on the fact that other investments may offer better returns, but also on the mounting trade tensions between Beijing and Washington.

The dollar nursed its losses against the yen on Thursday, having suffered its biggest one-day drop in almost eight months following a report that China was ready to slow or halt its purchases of U.S. Treasuries.

The Bloomberg report said that trade tensions between the two countries could provide a reason for Beijing to slow down or halt the purchases.

In the end, China lifted its Treasuries holdings by $167 billion in 2009, or 23 percent, US data show.

Other experts dismiss the idea that China would use bonds to play politics.

The 10-year note yielded 2.56% at about 2 p.m.in NY, little changed on the session and down from as high as 2.595% earlier.

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Yet there are rising concerns that, with central banks moving towards tighter monetary policy, the good times are now coming to an end.

Trading after the China news shows investors didn't exactly storm the exits. "Consequently, some future selling of USA treasuries may be forthcoming by market participants, including from China, as well as elsewhere, because of inflation pressures", say Grace and Haddad.

If central bank reserves are to be truly diversified, or bare any resemblance to the shape of the global economy, then reserves managers have to keep pace with this trend.

The Canadian dollar nursed its losses, having slipped on Wednesday as worries of a U.S. NAFTA withdrawal tempered bets that the Bank of Canada will raise interest rates next week. "It's challenging to find any real substantial alternatives", with China earning dollars - the flip side of the USA current account deficit. That's just how markets work. The session high for the global benchmark was US$69.37, highest since May 2015.

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.

USA inflation data for December are due on Friday morning, with traders closely watching for hints (http://www.marketwatch.com/story/why-us-inflation-data-will-be-a-litmus-test-for-bond-buyers-2018-01-09) that consumer prices are picking up at a faster pace that could speed up the Federal Reserve's expected rate increases.


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