(Reuters) - Officials reviewing China’s vast foreign-exchange holdings have recommended slowing or halting purchases of U.S. government bonds, seeing the market for them as becoming less attractive, Bloomberg News said on Wednesday.
GUY LEBAS, CHIEF FIXED INCOME STRATEGIST AT JANNEY MONTGOMERY SCOTT LLC IN PHILADELPHIA
“The reason that China holds Treasuries doesn’t have to do with their tactical trading and profit goals. China owns Treasuries because they export goods to the United States and they get dollars in exchange for those goods and they have to do something with those dollars. As long as China continues to export goods to the U.S. on that basis, they’ll need to invest dollars in something.”
JONATHAN COHN, INTEREST RATE STRATEGIST, CREDIT SUISSE IN NEW YORK
“On the face of it, it’s hard to tell whether this is a warning to Trump regarding trade tensions or whether it’s a distinct policy choice. Our contention would be that it is probably the former.”
“The composition of (China’s) FX reserves is roughly two-thirds in dollars, a quarter in euros and the rest across yen and sterling. Either they reallocate towards those currencies or within U.S.-denominated debt, which could include mortgages or deposits.”
“China’s running a large surplus with the U.S. so the currency situation means they’re going to pile up dollars over there already. It would be very hard for them to significantly decrease their Treasury holdings and those dollars that they already hold will have ...to go someplace.”
“(China) could buy debt from other emerging countries to increase their influence there. They may try to recycle these dollars into infrastructure and then let those companies buy material and equipment that way. They may increase their reserves so they more quickly become a global reserve currency. There’s a lot of things they could do.”
JIM VOGEL, INTEREST RATE STRATEGIST, FTN FINANCIAL IN MEMPHIS
“The reason there are so many people (in) Treasuries is that is all that’s out there to own. (China) could certainly increase their startup investments on a global basis as they’ve done in South America and in Africa. They could take a long-term strategic view with that FX pool. It would no longer be as liquid and would therefore reduce its ability to use it for foreign exchange adjustments.
“In terms of global central bank and FX reserve holdings of Treasuries, the typical holding period is concentrated below five years. But right now it’s affecting the long end more, because traditionally China has been seen as a buy-and-hold style investor. If they’re going to more actively manage their Treasuries, they may well pare from the back end.”
JACK ABLIN, CHIEF INVESTMENT OFFICER AT BMO PRIVATE BANK IN CHICAGO
“You take that and add that to foreign central bank restraint and we are going to see intermediate-term Treasury yields really head back towards fair value. I think fair value is around 4 percent. I don’t think Treasury yields will interfere with equities until they get to close to 3.5 percent so we still have a full percentage point move that I think the equity market can digest.
“It may give (the Fed) more room to hike short term rates, because they were probably fearful of maybe creating an inverted yield curve and this gives them a little more opportunity to raise rates on the front end if the longer end is rising.”
BRUCE BITTLES, CHIEF INVESTMENT STRATEGIST AT ROBERT W. BAIRD & CO IN SARASOTA, FLORIDA
“It’s pretty significant. That takes an important buyer out of the market... It’s upsetting the supply and demand balance if the report is true. Who’s going to replace the demand side?”
KEITH LERNER, CHIEF MARKET STRATEGIST, SUNTRUST ADVISORY SERVICES IN ATLANTA
“The big picture when you look at China, its Treasury year-over-year holdings have been negative for most of the last few years, from 2015 to 2017…I would say it’s not a dramatic shift overall for the market. However, I will say one more thing, that on the margins, it is helping push up yields in the U.S. treasury market.”
THOMAS SIMONS, SENIOR MONEY MARKET ECONOMIST, FIXED INCOME ECONOMICS AT JEFFERIES LLC IN NEW YORK
“If China stops buying Treasuries, the market could suffer. Treasury financing needs are going to rise significantly in 2018 and beyond relative to recent history, so Treasury is going to be looking for as many sources of demand as they can find. China turning away from the market potentially makes Treasury’s job harder.
“However, this prospect might already be old news since there is evidence that China has not been a big buyer of Treasuries for several years now.”
JASON PRIDE,DIRECTOR OF INVESTMENT STRATEGY AT GLENMEDE IN PHILADELPHIA
“This is political posturing. The U.S. tax deal that came out at the end of the year is more favorable to domestic U.S. companies and will make them more competitive against international peers particularly in regions where corporations aren’t taxed heavily like in China.”
“They may do it. It’s not that much of a worry. The U.S. is currently the one of the highest yielding best credits among governments in the developed world. The decision might not be the right investment decision for China but they might not do it.”
“What could happen is it could put pressure on the dollar. It does appear to be having that effect this morning.”
“On the margin if they’re not buying there’s less buyers. I don’t think there’s an undersupply of U.S. fixed income buyers … At this point the loss of the world’s largest buyer is not such a big deal. It’s sound paper. We’re one of the best positioned economies with one of the best balance sheets with the highest yields of the developed world.”
KATE WARNE, INVESTMENT STRATEGIST AT EDWARD JONES IN ST. LOUIS:
“Interesting China is at least reviewing how much Treasury debt it is going to buy. I doubt they will actually stop purchases altogether. They are one of the largest holders of U.S. debt so certainly they don’t want to disrupt the market overall. My guess is it has to do with them reviewing the composition of their holdings rather than making a call on whether Treasuries are attractive or not. It is not surprising we are seeing Treasury yields slightly higher but I wouldn’t expect the concerns about China’s purchases would disrupt such a large and liquid market.”
STOCKS: Wall Street’s major indexes slipped, the S&P 500 was down 0.3 percent.
BONDS: U.S. Treasury yields jumped to 10-month highs
FOREX: U.S. dollar down 0.5 percent against a basket of currencies.