Treasury Bond ETFs Weakening on Foreign Demand Concerns

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

U.S. Treasury yields jumped to 10-month highs on Wednesday after Bloomberg News reported that Chinese officials have recommended the country slow or halt its purchases of the U.S. bonds. The greenback also lost ground against a basket of major currencies. The Bloomberg News report had lifted yields on the 10-year government bond to a 10-month high on Wednesday.

This week's bond wobble comes as President Donald Trump looks to balance its huge trade surplus with China, and as Washington loses patience with Beijing over its handling of the North Korea nuclear crisis.

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

On the US economic front, the Labor Department released a report showing import prices rose by much less than expected in the month of December.

The Chinese officials, who were not named, said the market for US government bonds is becoming less attractive relative to other assets, according to the report. "There's no way on earth the Chinese stop buying US Treasuries", said Robert Pavlik, chief investment strategist, SlateStone Wealth in NY.

"The US Treasury market is a deep, robust market within the world and so we are confident that our economy, with the economy strengthening, that it will remain a deep, robust market", Mr Malpass told reporters.

China has the world's biggest foreign reserves of about US$3.1 trillion by December, which rose slightly in 2017 because of a 6.7 per cent appreciation of the Chinese currency.

Again, this was a report citing anonymous government sources. 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 dollar recouped some of its recent losses on Thursday after China's regulator dismissed a report that the country could halt its buying of US treasuries, boosting the greenback following its biggest one-day fall in a month. But it might not be time to panic yet, strategists at Danske Bank A/S said.

A shrinking pile of overall foreign exchange reserves could mean lower demand for U.S. bonds.

If central bank reserves are to be truly diversified, or bare any resemblance to the shape of the global economy, then reserves managers have to keep pace with this trend.

USA inflation data are forecast to show price pressures remain muted for now, giving hawks little reason to argue for faster tightening. However, we believe USA inflation pressures are picking up.

"If the reports turn out to be true and China no longer sees Treasuries as an attractive option, the repercussions could be significant as the country is one of the biggest holders of US debt", Craig Erlam, senior market analyst at OANDA in London, said in a note.

Remember, yields fall when bond prices rise.

The rising yields led Bill Gross of Janus Henderson, whose renown as a bond investor came to define the multidecade bull market for fixed-income securities, to pronounce the start of a bear market for bonds, although he said on Wednesday that he did not foresee drastic losses. That's just how markets work.

"We don't see a material impact on the Dollars, and our view is for further USD depreciation as the global economy picks up and "other" central banks look toward tightening their monetary policies", Grace and Haddad say.

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