Forex- Dollar Falls As China Considers Slowing US Bond Purchases

Forex- Dollar Falls As China Considers Slowing US Bond Purchases

The report suggests that China feels US debt is becoming less attractive when compared to other types of investments. Bloomberg notes that trade tensions with the US may provide a reason to slow or stop buying the debt of the USA government. There's a lot of talk right now about the high price of stocks and the length of the current rally, but even expert investors usually can't time the market. With concerns starting to rise about a rise in inflation due to the recent strength in oil prices it is understandable that bond markets might be nervous if a normally large buyer of United States treasuries either stops buying them or even starts to sell large amounts.

US inflation data are forecast to show price pressures remain muted for now, giving hawks little reason to argue for faster tightening.

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

China has the world's biggest foreign reserves of about US$3.1 trillion by December, which rose slightly in 2017 because of a 6.7 per cent appreciation of the Chinese currency. But they added that "Doubts about (U.S. bonds) allure should not be overblown as a threat of imminent dumping".

US stocks have had a strong start to the year, with the S&P and the Nasdaq having closed at record highs on every single day in 2018, buoyed by optimism over global economic growth and expectations of a strong quarterly earnings.

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.

Yields slipped and bond prices clawed back their earlier losses after a solid 30-year bond auction.

But Erlam says it is too "early to speculate" on the likelihood that China will "suddenly" reduce its holdings.

To contact the reporter on this story: Adam Haigh in Sydney at ahaigh1@bloomberg.net.

ASIA'S DAY: Japan's Nikkei 225 fell 0.3 percent to 23,710.43 and South Korea's Kospi retreated 0.5 percent to 2,487.91.

After moving to within a whisker of the 2.6% level (2.595% to be exact) yesterday, the yield on the USA government's 10-Year Treasury pulled back in the afternoon and closed at 2.55%.

"You already had this backdrop of rising rates and people are getting nervous", says Boris Rjavinski, senior interest rate strategist at Wells Fargo Securities in NY. "But it's a market where investors don't get much of a return".

The China report weakened the dollar, which was last down 0.2 percent, while safe-haven commodity gold jumped to its highest in four months.

Analysts said the move may be a political signal, rather than a policy-driven choice, citing the difficulties China would have extricating itself from the market and finding new places to invest.

Markets took a turn south following a report suggesting the Chinese authorities now view USA government bonds as weak.

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