All told, the three central banks are sitting on $14 trillion in securities they have bought since 2009: a $4.4 trillion mix of Treasuries and mortgage securities held by the Federal Reserve; the European Central Bank’s $5 trillion in corporate and government bonds; and $4.5 trillion worth of bonds and exchange traded funds accumulated by the Bank of Japan.
United States investors were spooked by a Bloomberg report, based off an anonymous leak, that China may slow down – or even stop – its buying of United States government bonds.
On Wednesday, Bloomberg, citing unidentified people familiar with the matter, said China found that US bonds were becoming less attractive and that trade tensions with the USA could provide a reason to stop buying American government paper.
It is unclear whether the recommendations have been adopted by the Chinese government, Bloomberg reported.
“Like other assets, China’s investment in U.S. Treasurys is market-driven and is managed professionally based on investment demand and market conditions”, the SAFE said.
There are many reasons why China’s holdings of US Treasuries might shrink in the years ahead, although none of these are connected to Wednesday’s reports. The 10-year Treasury yield (candlestick chart) hit another 10-month high Tuesday above 2.5%. Wall Street survived a wobble in late 2015-early 2016 to rise 25 percent.
The team at Capital Economics isn’t that anxious, however, noting that China’s holdings of Treasury bonds have remained more or less stable in recent years and that any shift away would risk lowering the value of their own holdings.
“Central bank reported holdings of US treasuries will generally register a decline when global foreign exchange reserves or the Dollars depreciates (chart 3)”.
The reports out of China affected a market that bond investor Bill Gross, among others, have already said is under pressure. This would potentially be a bit bullish, but some Wall Street analysts think the oil market has gotten over-heated, and USA production remains near record levels.
Reduced asset purchases by the world’s top central banks, rising commodity prices and looming US debt sales all support the case for higher bond yields. The Fed is also expected to raise rates three times this year.
The Gordon Brown example highlights why Commonwealth Bank of Australia is saying Wednesday’s reports over China and its US Treasury holdings are unreliable.
US bonds sold off on Wednesday – and that may have been the point. “If yields rise too much it would put a halt to growth momentum and slow down the Fed hikes and stock market performance – and then put a break on the bond sell-off”.
The yield on the benchmark 10-year Treasury note rose 2.4 basis points to 2.476%, while the 2-year Treasury note yield was up just 0.4 basis point at 1.96%.
Martin van Vliet, a senior interest-rate strategist at ING Bank NV, underscored the spillover effects on Treasuries from the Japanese and German bond markets, noting that there’s “a lot of supply” coming in euro-area government bonds and the sovereign-related market.
The recent moves higher in yields has shown that bond markets are at a turning point for technicals, according to strategists at Deutsche Bank AG, including the global head of credit strategy, Jim Reid.