Investors spooked by report China could curtail USA government bond purchases

Posted January 14, 2018

The yield on the USA 10-year Treasury shot up to just short of 2.6 per cent, its highest point since March 2017, while Japanese 10-year Treasuries hit an nearly six-month high of 0.087 per cent.

Bloomberg News, citing unnamed people close to the matter, said Chinese officials are considering slowing - or even stopping - its purchases of USA government debt. The debt is re-payed over ten years, and the buyer, such as China, gets a very solid interest return during that time or at the end of the loan period.

The dollar had been on the back foot even before the news report as the Bank of Japan's move to trim its purchases of long-dated government bonds (JGB) this week reverberated across currency markets.

A combination of factors has pushed global bond yields higher in recent weeks, with global growth and higher oil prices leading investors to speculate that the world's major central banks might withdraw from their stimulus program sooner rather than later.

Some investors saw a reduction of bond purchases by the Bank of Japan this week as a potential indication of this.

We would be cautious about reading too much into the report, although the market reaction does highlight the negative sentiment towards bonds at present.

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The knee-jerk reaction for bond-bears was to sell bonds, but a strong U.S. treasury auction and cool analysis from some strategists prompted a turnaround.

The move also comes at a particularly delicate time when the Fed is unwinding its balance sheet into an environment of rising supply.

Energy stocks also added a few points to the index as oil prices stayed robust due to production cuts and a fall in US inventories.

Toyota fell 1.41%, Honda lost 1.93% and Canon shed 0.44%.

The S&P 500 initially fell 0.4% after Bloomberg's report, but it has since recovered those losses.

Also on the inflation front, last week's employment report showed a pretty solid 0.3% rise in wages in December, and wages are now up 2.5% year-over-year, compared with more like 2% a few years ago. The Australian and New Zealand dollars rose, with up 0.22% to 0.7841 and trading at 0.7186, an increase of 0.36%. Both the SPX and COMP had been higher earlier in the day, but came under pressure as the session advanced. The report sent US Treasury yields to 10-month highs and the dollar lower.

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"Japanese [bond] yields have been rising and this has been reinforcing the move on the yen", Thu Lan Nguyen, a Frankfurt-based FX strategist at Commerzbank.

Treasuries traded at the highest level in about 10 months after spurring bond veteran Bill Gross to declare a bear market on Tuesday.

The top performer in FX markets was again the Japanese yen, extending its gains from the previous night after the BoJ reduced its purchases of longer-dated JGBs.

On top of that, Wall Street also fell after Reuters reported that Canada is increasingly convinced Mr Trump will soon announce the United States intends to pull out of the North American Free Trade Agreement (NAFTA).

The MSCI world equity index, which tracks shares in 47 countries, was up 0.1 percent.

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