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China: FX reserves being diversified, USA bond report may be fake

14 January 2018

Financial markets were jolted Wednesday morning by a report that China - the biggest foreign holder of US government bonds - could curtail its purchases, a shift that has spooked investors already leery of a rise in interest rates at the start of 2018.

Bloomberg News reported Wednesday, citing people familiar with the matter, that officials in Beijing have recommended the Chinese government lower - or even stop - its buying of US sovereign debt.

This came after the Bank of Japan dialled back its purchases of longer-term Japanese government bonds, a move which triggered speculation that the central bank could be planning to adjust its quantitative easing purchases. 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.

China's foreign exchange reserves, the world's largest, rose US$129.4 billion in 2017 to US$3.14 trillion, as tight regulations and a strong yuan continued to discourage capital outflows, data from China's central bank showed.

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And three, the Federal Reserve is actively working to lift interest rates at a time when the stock market's performance is increasingly reliant on the flow and availability of cheap credit via debt-funded share buybacks and M&A activity. Even before today's news, yields had been climbing amid positive US economic data, rising rates in Europe, and some market chatter this week that Europe and Japan might be inclined to take their feet off the stimulus gas pedal a bit earlier than expected due to economic growth.

The precious metals joined other commodities in moving higher on Wednesday morning thanks to a sharp drop for the US dollar and a massive sell-off of bonds.

Last year Gross said if ten-year yields were persistently above 2.4% this would signal a bear market, but added in an interview last week that in such an environment investors would be unlikely to lose a lot of money.

Some said China's move served as a warning to the USA administration that it could face higher borrowing costs should it start a trade war with Beijing ahead of the new United States tariff measures expected in the coming weeks.

"Market reaction to dollar-buying factors has been subdued, while market reactions to dollar-selling, and yen-buying factors, have been more vivid", Murata said.

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Pimco, a unit of German insurer Allianz SE, oversaw more than $1.69 trillion in assets under management as of September 30, 2017.

Among other metals, palladium dropped 1.5 per cent at US$1,083.97 an ounce, after hitting a record high on Tuesday at US$1,111.40.

Futures on the S&P 500 were down 0.1 percent as of 8:17 a.m. Frankfurt time. Higher bond yields sometimes draw investors away from higher-yielding sectors.

The German 10-year bond yield rose 4.1 basis points to 0.520%, more than a five-month high.

Volume on US exchanges was 6.93 billion shares, above the 6.38 billion average for the full session over the last 20 trading days. That's just how markets work.

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China: FX reserves being diversified, USA bond report may be fake