Reports say China may slow US Treasury purchases, trade tensions cited

Wall Street spooked by US-China trade tension

Balancing a retirement and college savings can be overwhelming.

Senior government officials in Beijing reviewing the nation's foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries, according to people familiar with the matter. The report suggests that China feels USA debt is becoming less attractive when compared to other types of investments.

They reportedly also referenced trade tensions with Washington as a reason to lower the pace of debt purchases. "A significant change in policy could put considerable upside pressure on USA yields". The Fed is also expected to raise rates three times this year.

The report fueled concern that China might use its $1.2 trillion Treasury stockpile - the largest of any foreign country - as leverage should U.S. President Donald Trump act on his administration's increasingly confrontational trade rhetoric. Japan was second with US bond holdings worth $1.09 trillion.

Any reduction in Chinese purchases would come just as the USA prepares to boost its supply of debt.

The yield on 10-year Treasuries was four basis points higher at 2.59 per cent as of 12:16 p.m.in London, reversing a decline to 2.54 per cent earlier Wednesday.

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

Treasury holdings
China is reportedly thinking of halting US Treasury purchases and that's worrying markets

The U.S. 10-year yield rose to 2.56 percent on Wednesday, hitting levels not seen since last March. It finished unchanged at 2.55%. Such measures - already used by Beijing against countries like South Korea - could include informal regulatory actions that deny market access to USA firms and goods, they said.

And China could get even tougher.

"The dollar was already notably weak ahead of today, despite the fact that US data remained strong and yields continued to rise", said Boris Schlossberg, managing director of FX strategy at BK Asset Management in NY.

"This happens every time rates go up", Paulsen explains.

A possible slow-down or halt to China purchasing US Treasury yields could have significant repercussions.

The key question is whether it is in China's best interest to sell U.S. Treasuries as an opening salvo in what could become a trade war, analysts say.

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