Reports that China may halt USA government bond purchases may be incorrect

Francis Osborne
January 13, 2018

The news sent 10-year US Treasury bond yields to their highest levels since March last year, while the dollar fell against a number of major currencies.

Yields on 10-year Treasuries ended Wednesday little changed at about 2.56 percent, pulling back from close to the highest levels since 2014, and were at 2.53 percent Thursday in Asian trading. That has caused the two-10-year U.S. yield curve to steepen to 59 basis points - a jump of 10 bps this week.

Still, this isn't likely to be the end of concerns about the bond market in what is emerging as they key theme for 2018: The risk of a disorderly rise in interest rates caused by bond market weakness spilling over into stocks.

Corporate earnings were also in focus in Japan. "They sort of assumed that the BOJ would keep its foot in hard on the accelerator", said Michael Hewson, chief markets analyst at CMC Markets in London.

But others say China does not have too many options besides the United States government bonds into which it can invest its large forex reserves, making quick and dramatic moves unlikely.

There may be bond market tremors right now but no quake.

"It's entirely possible that China could take measure to rebalance their reserve as they have done in the past", Innes said.

"The about to issue a whole lot more debt in an environment where the demand for that debt is about to go down", said Daniel W. Drezner, a professor of global politics at the Fletcher School of Law and Diplomacy at Tufts University.

Rising oil prices could fan inflation down the road, which could be detrimental to some countries that have been prone to high inflation. We need to push through the 1.3660 area to open up a move beyond the 1.3700 area towards the 1.3830 level and February 2016 pre Brexit vote lows.

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Brent crude futures traded at $69.03 a barrel, down 17 cents, after rising as high as $69.37 on Wednesday, highest since May 2015.

The yen was buoyed this week after a cut in the Bank of Japan's bond buying on Tuesday fuelled speculation that the central bank could eventually seek to exit from its stimulus later this year, following in the footsteps of other major central banks. "I don't think that's worked out so poorly for the U.S".

The Japanese government bond yield ticked up to 0.080 per cent, the top of its range in the past several months.

The Treasury Department auctioned $12 billion in 30-year bonds at a high yield of 2.867 percent.

This could result in very bad things for the bond market for a few reasons. The closed 0.11% lower, while the closed at 7153.57, down 0.14%.

The MSCI world equity index, which tracks shares in 47 countries, was flat.

Among other metals, palladium dropped 1.5 per cent at $US1,083.97 an ounce, after hitting a record high on Tuesday at $US1,111.40.

The pan-European FTSEurofirst 300 index .FTEU3 lost 0.26 percent and MSCI's gauge of stocks across the globe .MIWD00000PUS gained 0.38 percent.

The World Bank sees growth in the advanced economies as a whole slowing from 2.3% in 2017 to 2.2% next year, 1.9% in 2019 and 1.7% in 2020. Investors are taking profits in high-flying hi-tech shares. "The boring explanation here is that China just has enough Treasuries in its portfolio", said Brad Setser, an expert in global capital flows at the Council on Foreign Relations.

Other reports by TheDailyFarc

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