Bloomberg sources revealed China’s plans to slow or even halt purchases of the US debt. China holds the largest foreign currency reserves in the world, and is the biggest holder of US debt.
As the rumours hit the market, 10-year US treasuries yield surged to the highest level since March.
US 10-Year Bond yield, %
Falling returns on American debt relative to other state bonds and deteriorating relationship between China and the US are named as prime reasons for such measure.
If China significantly reduces its position in treasuries, this would mean headache for the Treasury department, which is busy raising even more money to finance growing expenses and setback the Fed’s balance sheet reduction.
China’s State Administration of Foreign Exchange later denied the rumoured development.
Mikhail Dorofeev, chief portfolio analyst and strategist at DTI Algorithmic:
«Information regarding the moods about US debt is very valuable for the market, as it is an underlying factor of its pricing. Fed is currently tightening its monetary policy and raising the rates. These measures will inevitably lead prices to fall and yields to rise on the US debt. Not only China, but all market participants understand this, as it is fundamental to the bond market. Holders of the US debt see their portfolio slowly but surely fall in price, and that makes them nervous.
Therefore I understand why China would want to rebalance its portfolio by reducing the share of underperforming treasuries. Obviously, announcing it publicly would only make the decline further, so it is not in China’s interest. Slowly unloading the portfolio on the calm market would be preferable.
As the bond market has already started its descendance, warning signs from its biggest holders may indicate an acceleration in the treasuries sell-off.
It is important to remember that, as technical analysis teaches us, bond markets turn around the same time as commodities futures grow. Bonds and commodities are the leading indicators for stocks, pointing at the ‘risk-on’ mode, which is precisely what is happening at the financial markets at the moment. Investors should not be surprised when, once commodities and bonds yields reach the peak, stock market rally of the last years will come to an end.»
Also published on Medium.