stayontheblack.com

Business

The 3-decade bond bull market is in danger

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

On Wednesday, Bloomberg News reported that officials in China, the largest foreign holder of USA government debt, had recommended the country slow down or halt its purchases of the bonds amid a less attractive market for them and rising U.S.

China is the world's biggest foreign holder of U.S. Treasuries, and its purchases are one factor that have kept the bond market supported and yields low over the last decade. The report suggests that China feels USA debt is becoming less attractive when compared to other types of investments.

US stocks fell on Wednesday as investors raised concerns over the possibility of China slowing or halting its Treasury bond purchases and the USA withdrawing from NAFTA.

Investors monitor stock prices in a brokerage house in Beijing on January 2, 2018.

The strategists question the reliability of the report because, if China really were about to stop buying US Treasuries and made a decision to telegraph it beforehand, then it would hurt itself by driving down the value of the bonds already held on the PBOC's balance sheet.

United States inflation data are forecast to show price pressures remain muted for now, giving hawks little reason to argue for faster tightening. Though the Fed raised rates three times past year, borrowing costs remain pretty low by historic measures.

"As long as China continues to export goods to the USA on that basis, they'll need to invest dollars in something", said Guy LeBas, chief income strategist at Janney Montgomery Scott LLC in Philadelphia. But they added that "Doubts about (U.S. bonds) allure should not be overblown as a threat of imminent dumping". The driving forces include global economic growth, the U.S. Federal Reserve raising its benchmark rate and other central banks reducing quantitative easing policies of buying sovereign debt to repress rates.

The US dollar fell, as did US bonds and stocks.

Bond prices climbed well off their early lows before closing roughly flat.

But Erlam says it is too "early to speculate" on the likelihood that China will "suddenly" reduce its holdings.

A treasury bond is a marketable, fixed-interest USA government debt security with a maturity of more than 10 years.

The financial market reaction to the Bloomberg report was swift. The report sparked a selloff in USA bonds that sent 10-year Treasury yields (http://www.marketwatch.com/story/10-year-yield-jumps-close-to-26-after-report-china-may-end-us-bond-buying-2018-01-10) higher, close to 2.6% in Wednesday's action.

ASIA'S DAY: Japan's Nikkei 225 fell 0.3 percent to 23,710.43 and South Korea's Kospi retreated 0.5 percent to 2,487.91. "What that means is interest rates are about to go up".

However, anyone who knows anything about China's currency flows is aware of the fact that the world's second largest economy generates a massive amount of US dollars due to its trade with the United States. So, since the bond bears failed to create a second consecutive day of panic, should we conclude that the worry about the bond market is over?