China could slow/halt US Treasury purchases

US treasury yields spiked up following the news, with the yield on 10-year US Treasuries rising to a 10-month high of 2.588% in European trading.

Officials have recommended that China closely watch factors such as the outlook for supply of U.S. government debt, along with political developments, including trade disputes, when deciding whether to cut some Treasury holdings, say reports citing sources.

"American debt is so well respected around the world - if China pulls out a billion, somebody else will pick it up", said Sen.

"The Chinese are applying pressure to the Treasury market just as the Fed is about to step away from being the buyer of last resort", said Boris Schlossberg, managing director of FX strategy at BK Asset Management in NY. Japanese 10-year government bonds yield about zero. If China reduces it bond purchases, buyers that could step in include other sovereigns, banks, large asset managers and insurance companies.

So, how should investors position themselves if we are expecting this kind of price action across the bond market?

USA inflation data for December are due on Friday morning, with traders closely watching for hints ( that consumer prices are picking up at a faster pace that could speed up the Federal Reserve's expected rate increases.

"I think bonds produce a return of zero to 1 percent", he said. Bonds rallied further and the 10-year Treasury yield slid to 1.36 percent, the lowest since World War Two.

ENERGY: Benchmark U.S. crude oil rose 71 cents to $63.66 per barrel in electronic trading on the New York Mercantile Exchange. That left it 1.6 percent higher against the dollar for the week.

So if it truly is curtains for the bond bull market, how long will the bear period last?

Eswar Prasad, a China expert at Cornell University, said the move "may reflect a shot across the bow from the Chinese government as it braces for trade hostilities emanating from Washington".

It said investments in Treasuries are decided by market conditions.

Reuters-polled economists expecting retail sales (for the month of November) to rise by 0.4 per cent.

March U.S. Dollar Index futures settled at 92.07, down 0.190 or -0.21%. The euro fell slightly to $1.1940 from $1.1948.

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Asian shares flinched from testing their 2007 record peak as investors booked profits in high-tech shares. Hong Kong's Hang Seng index edged 0.2 percent higher to 31,120.39 and the Shanghai Composite index erased earlier losses to edge 0.1 percent higher at 3,425.34.

"Markets will be higher at the end of next year than they are right now, in my opinion, but it's going to be a little volatile getting there", Jonathan Slone, chief executive officer of CLSA Ltd., said on Bloomberg TV.

  • Salvatore Jensen