Is China halting US Treasury purchases?

Janus Henderson's Bill Gross

Chinese officials responsible for reviewing the country's enormous foreign exchange reserves have recommended either slowing or stopping purchases of US Treasury bonds, Reuters reports via Bloomberg News.

The 10-year U.S. Treasury yield hit 2.57 per cent for the first time since March last year.

Gross cited three reasons for his bearish bond call: Rising nominal U.S. GDP that will stoke inflation, reduced purchases from global central banks, and higher budget deficits in the U.S.

"The Chinese are applying pressure to the Treasury market just as the Fed is about to step away from being the buyer of last resort", said Boris Schlossberg, managing director of FX strategy at BK Asset Management in NY.

"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 worldwide affairs in the administration of former President Barack Obama.

The euro was at $1.1939, up from $1.1935, and at ¥133.46-47, down from ¥133.61.

Later that month, Hu Xiaolian, director of China's SAFE, said Treasuries form "an important element of China's investment strategy for its foreign-currency reserves".

US shares snapped their rally on Wednesday while the Canadian dollar and the Mexican peso fell after a Reuters report said Canada increasingly believes that President Donald Trump will soon announce his intention to withdraw from the North American Free Trade Agreement treaty.

The retail sector was mixed after the Australian Bureau of Statistics said sales rose 1.2 per cent in November, driven by the release of the iPhone X and promotions such as Black Friday.

Brent crude rose 0.5 per cent to $69.15 per barrel, staying near its highest level since mid 2015.

March 2018 3-year bond futures contract at 97.785 (2.215pct), from 97.850 (2.150pct). "It's challenging to find any real substantial alternatives", with China earning dollars - the flip side of the US current account deficit. "I don't think that's worked out so poorly for the U.S". Major stock indexes in the United States were down only slightly on Wednesday, and the VIX index, which measures investor expectations of a sharp market move in the future, remained just over 10, a very low level.

Against a basket of currencies, the dollar was down 0.2 per cent. "But the earnings and economic outlook in Asia remains solid", said Yukino Yamada, senior strategist at Daiwa Securities. Last year, he called Federal Reserve Chair Janet Yellen a "modern day Goldilocks" and referred to quantitative easing as "financial methadone".

"The dollar may fall to around ¥110" in the days to come, the official said.

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