BEIJING/LONDON – China is adding to bond investors’ jitters as traders brace for what they fear could be the end of a three-decade bull market.
Senior government officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasurys, people familiar with the matter said Wednesday.
The news comes as global debt markets were already selling off amid signs that central banks are starting to step back after years of bond-buying stimulus. Yields on 10-year U.S. Treasurys rose for a fifth day, touching the highest since March.
China holds the world’s largest foreignexchange reserves, at $3.1 trillion, and regularly assesses its strategy for investing them. It isn’t clear whether the officials’ recommendations have been adopted. According to sources who asked to not to be named, Chinese officials think the market for U.S. government bonds is becoming less attractive relative to other assets, and trade tensions may provide a reason to slow or stop buying U.S. debt. China’s State Administration of Foreign Exchange didn’t immediately reply to a fax seeking comment on the matter.
“With markets already dealing with supply indigestion, headlines regarding potentially lower Chinese demand for U.S. Treasurys are renewing bearish dynamics,” said Michael Leister, a strategist at Commerzbank AG. “Today’s headlines will underscore concerns that the fading global quantitative-easing bid will trigger lasting upside pressure on developed-market yields.”
The Chinese officials didn’t specify why trade tensions would spur a cutback in U.S. Treasurys purchases, though foreign holdings of U.S. securities have sometimes been a geopolitical football in the past. The strategies discussed in the review don’t concern daily purchases and sales, said officials, who recommended that the nation closely watch certain factors when deciding whether to cut some Treasury holdings. Specifically, the factors include the outlook for supply of U.S. government debt, and political developments such as trade disputes between the world’s two biggest economies, the people said.
A U.S. Treasury official signaled confidence in the U.S. government debt market which, at $14.5 trillion, is the world’s largest.
“The U.S. Treasury market is a deep, robust market within the world and so we are confident that our economy, with the economy strengthening, that it will remain a deep, robust market,” Under Secretary for International Affairs David Malpass told a group of reporters in Brussels.
Bond veteran Bill Gross says a bear market has begun.
Any reduction in Chinese purchases would come just as the U.S. prepares to boost its supply of debt. In its most recent quarterly refunding announcement in November, the U.S. Treasury Department said that borrowing needs will increase as the Federal Reserve reduces its balance sheet and as fiscal deficits look set to widen.
“It’s a complicated chess game as with everything the Chinese do,” said Charles Wyplosz, a professor of international economics at the Graduate Institute of International and Development Studies in Geneva. “For years they have been bothered by the fact that they are so heavily invested in one particular class of U.S. bonds, so it’s just a question of time before they would try to diversify.”
Some investors said that the market could take the China news in stride, considering the nation’s net purchases of Treasurys have already slowed “significantly.”
“If China ceases to be a net purchaser of U.S. Treasurys, this is unlikely to have a significant impact on the overall yield curve unless China divests a large share of its total holdings in a short time period,” said Rajiv Biswas, chief Asia-Pacific economist at IHS Markit.
Yields were already climbing this week amid expectations the improving global economy will boost inflation pressures round the world, just as major central banks scale back their asset purchases.
Markets are also braced for a deluge of debt supply this week. The U.S. is scheduled to reopen $20 billion of 10-year debt Wednesday, followed by $12 billion of 30-year bonds Thursday. Germany sold €4.03 billion of 0.5 percent 10-year bonds Wednesday with syndications in Italy and Portugal to follow.
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