Bond yields spike as China questions U.S. treasuries


The BoJ's actions are not seen as a sign of an impending shift from ultra-accommodative policy, but yet another sign of central banks stepping back from global bond markets, as the US Treasury is expected to sell the most debt in eight years in a bid to reduce its $4.4trn balance sheet. As in 2009, the latest news fanning concern about China's appetite for US borrowings comes at an inopportune time, with the Treasury set to ramp up issuance as the Federal Reserve is shrinking its balance sheet.

Any reduction in Chinese purchases would come just as the United States prepares to boost its supply of debt. Most stock markets in Southeast Asia were weaker.

Beijing is the biggest holder of US debt and the Bloomberg report was seen by some as a veiled threat to US President Donald Trump following his tough talk on global trade and China's "unfair trade practices".

Bloomberg, citing unidentified sources, reported Chinese authorities were considering slowing or halting purchases of Treasuries and said they might cite trade tensions as a reason.

The $14 trillion Treasury market has been roiled in the past 48 hours.

A fire sale would also hit the value of China's vast Treasury holdings and may even end up weakening the yuan against the dollar, experts say. "I don't think that's worked out so poorly for the U.S".

A report from Bloomberg suggesting that China may be looking to slow or halt purchases of USA government bonds rippled across the markets.

Beijing keeps a big share of its $3.1 trillion in foreign currency reserves in Treasury debt, which is considered safe and easy to trade.

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Therein lies the rub about calling for doomsday in this market: History has proven time and again that yields rise and fall in fits and starts.

Crude oil prices jumped on Wednesday and settled near three-year highs after US government data showed a drop in crude inventories and production, though the fall in the latter could be the result of extreme cold temperatures across the United States.

The stakes may be higher now as tensions with the USA have been building since the election of President Donald Trump, who's been critical of the American trade deficit with China and other countries.

The amount of Treasuries that foreign central banks hold in custody with the Fed and the movement of the yuan point in that direction, in view of some analysts.

In 2016, China's treasury holding tumbled US$187.7 billion when the country was briefly dethroned by Japan as the top holder of USA government debt, as China's central bank dipped into its reserve to defend the ailing yuan.

The dollar then rallied and was up 0.4 percent against the yen, although the US currency is still down more than 1 percent against the yen this week after markets bet the Bank of Japan (BoJ) could start to tighten monetary policy faster than expected. On Wednesday, the yield was trading around the highest level since March a year ago.

The US government uses treasuries (or T-Bonds) to help finance itself.