Published: Wed, January 10, 2018
Money | By Armando Alvarado

Why Impact on Dollars of Surge in Treasury Yields Might be Limited

Why Impact on Dollars of Surge in Treasury Yields Might be Limited

It is not clear if the recommendations of the review have been adopted.

Treasury prices fell, boosting yields.

- US government note and bond yields rose sharply Wednesday after Bloomberg reported that China may halt its purchases of US Treasuries. China's State Administration of Foreign Exchange didn't immediately reply to a fax seeking comment on the matter.

"The latest rise (in yields) is caused by the news that Chinese official are recommending lower purchases of U.S. Treasuries for their FX reserves", said Mizuho strategist Antoine Bouvet, referring to a Bloomberg report. The only viable market which can absorb those dollars in the one for USA government paper.

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China has the world's biggest currency reserves, approximately US$3 trillion, and is the biggest foreign holder of USA government debt, with US$1.19 trillion in Treasuries as of October 2017, data from the Treasury Department show. The yield on the benchmark 10-year Treasury note was almost five basis points higher at 2.588% in early US trading, helping weaken the US Dollar Basket (DXY) to 91.52 from 91.80 when the report was published.

Any reduction in Chinese purchases would come just as the USA prepares to boost its supply of debt. Investors are also concerned that companies may reduce bond holdings if they repatriate funds from overseas following the passage of the US tax bill.

"If China ceases to be a net purchaser of U.S. Treasuries, 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, Singapore-based chief Asia-Pacific economist at IHS Markit. The 10-year Japanese Government Bond (JGB) yield bucked the trend, trading flat at 0.087%. Treasuries traded at the highest level in about 10 months after spurring bond veteran Bill Gross to declare a bear market on Tuesday. Germany sold 4.03 billion euros of 0.5 percent 10-year bonds Wednesday with syndications in Italy and Portugal to follow.

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