China may stop buying US Treasury bonds

The U.S. dollar fell against a basket of major currencies on Wednesday after a report that China was ready to slow or halt its U.S. treasury purchases, with the greenback on track to post its biggest single-day drop against the Japanese yen in seven weeks.

Rising yields mean lower prices, which in turn cut into returns for bond investors looking for capital appreciation.

The US Dollar rose during early trading in London Thursday as traders shook off earlier concerns over a reported threat by Chinese officials to walk away from the US Treasury bond market.

"The market is pricing in this possibility, but we still don't have much have detail on this". However, the situation is worth monitoring.

USA 10-Year Treasury yields rose to fresh 10-month highs following the report.

ANALYST'S TAKE: "Justifiably, Beijing's biggest worry is that the value of its US bond holdings will be eroded substantially by rising inflation and supply", analysts from Mizuho Bank Ltd. said in a daily commentary. However, if the 10-year yield goes above 2.63%, he thinks it would be a "big deal" that could accelerate the bond selloff.

Gold prices jumped to a four-month high as traders ramped up their purchases of the safe haven asset. The yield curve from two to 10 years steepened by 5.4 basis points, the most in over a year, to 57.43 basis points. In his mind, rising yields could start to hurt stocks once the 10-year climbs above that same 2.63% threshold.

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USD/JPY: Bank of Japan's Yield Curve Control Could Weigh

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. This has helped companies invest in their operations and conduct mergers and acquisitions, among other things.

Gundlach's trepidation about the bond market also extends to equities.

Until this morning, the firm momentum from 2017 had continued to carry into the New Year, with little sign of the profit taking some market professionals had anticipated. The MSCI All-Country World Index dipped less than 0.05%, the first retreat in more than a week. In football, if running up the middle keeps working, a team is likely to keep doing it. "All those people that would have had that trade on are stopped out", he said.

Tuesday was one of those days where just focusing on the Dow Jones Industrial Average ($DJI) might fool you. Aluminum and airline stocks carried the day, with Boeing Co (NYSE:BA) up 0.6%. The broader S&P 500 (SPX) and Nasdaq (COMP) also registered gains, but only modest ones. Its session high of US$1,326.56 was its highest since Sept 15.

United States dollars under pressure Vs JPY after the Bank of Japan (BOJ) moved to trim its long-dated government bond purchases this week, was on track to post its biggest 1-day drop Vs JPY in 7 weeks. Any news, opinions, research, data, or other information contained within this website is provided as general market commentary and does not constitute investment or trading advice.

In central banking news, Bill Dudley of the New York Fed and James Bullard of the St. Louis Fed will each be speaking later today.

The 10-year yield moved above 2.5 percent earlier Tuesday before paring its gain, and then resumed its upward shift in USA trading hours, making fresh highs. Chart source: The thinkorswim platform from TD Ameritrade. Past performance does not guarantee future results.

  • Eleanor Harrison