Gold up on news China may slow bond buys

Joy Montgomery
January 13, 2018

China has rejected a news report about its plans to slow or halt purchases of US Treasury bonds, saying it is either "fake news" or based on incorrect sources.

The dollar fell against other currencies on Wednesday after a report that China may slow or halt its US treasury purchases, with the greenback falling more than 1% against the Japanese yen. The use of Treasury notes as a financial weapon is sometimes referred to as the "nuclear option" in financial markets.

The 10-year US Treasury yield hit 2.57 per cent for the first time since March last year.

China's holding of U.S. government debt - the world's largest, climbed US$131 billion in the first 10 months of 2017 to US$1.19 trillion, data from the Treasury Department showed.

The forex reserves investment in US Treasury bonds is a market activity, with investment professionally managed according to market conditions and investment needs, it said. Such measures-already used by Beijing against countries like South Korea-could include informal regulatory actions that deny market access to US firms and goods, they said. It isn't clear whether the recommendations of the officials have been adopted, Livemint reported.

In the end, China lifted its Treasuries holdings by $167 billion in 2009, or 23 percent, USA data show.

In the past two weeks, two of China's star companies, Ant Financial and Huawei, have met setbacks in the U.S. market where their investments were being obstructed, triggering a wave of mainland Chinese state media criticisms against the USA government for its "protectionism".

China's foreign exchange reserves - the world's largest - rose to US$3.14tn in December.

There are signs that the adjustment the Chinese officials recommended may already be happening.

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True that and perfectly rational, particularly given the previous day's commotion over the Bank of Japan's (BOJ) announcement that it's trimming its purchases of 10 to 25-year and 25 to 40-year JGBs by ¥10 billion each.

In the eyes of some, Chinese officials may be trying to send a message that they have leverage with President Trump talking tough on trade.

"It's certainly more of a hawkish tilt in the minutes", said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto. "That doesn't mean that it is".

Bloom agrees that China has few places to shift its reserves.

Rising Treasury yields can pressure prices for gold, but the dollar's slide helped gold shrug off the impact.

On Wall Street, the banking sector surged, led by shares in JPMorgan and Wells Fargo.

China Premier Li Keqiang said China's economy grew by about 6.9% a year ago, the official Xinhua News Agency reported Thursday.

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 USA treasuries either stops buying them or even starts to sell large amounts.

Of course, regardless of the eventual reason behind such a move, the idea that China's holdings of USA bonds won't still shrink coud turn out to be wrong. "And when it comes to the heightened political interaction between China and the USA, there has always been this tension".

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