Pimco could add US Treasuries if market weakens further: Ivascyn

Janus Henderson's Bill Gross

Janus Henderson's Bill Gross

A report that China is reconsidering how much US debt it buys rattled markets on Wednesday and raised questions about the relationship between the world's two largest economies.

China, the biggest buyer of USA sovereign bonds, could be slowing down or even halting its purchases, according to a report.

Why would China dump US debt?

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.

"We are far more inclined to see a move by SAFE, if confirmed, as a conventional investment decision", Eurasia Group said.

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And while 2018 has brought some telegraphed risks into sharper focus, nothing has rocked the foundation of the $14.5 trillion Treasuries market, said Aaron Kohli, an interest-rate strategist at BMO Capital Markets in NY.

Market sentiment seems tilted toward the dollar's downside, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo. "I don't think we're headed for investment Armageddon".

He added that a "politically induced" sell-off of Treasuries would threaten global economic growth, which would be bad news for China and its big export industry.

U.S. Treasuries pared some of their losses, pushing down the 10-year yield to 2.544 percent from Wednesday's 10-month high of 2.597 percent, hit after a Bloomberg report that China is considering slowing or halting purchases of U.S. Treasury bonds.

The speculation that China may reduce its buying in United States bonds helped to underpin the euro, the most obvious alternative assets to the USA dollar. Estimates say China now holds around $1.2 trillion (€1.0 trillion) in U.S. debt, an amount that has doubled over the past 10 years.

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Beijing keeps a big share of its $3.1 trillion in foreign currency reserves in Treasury debt, which is considered safe and easy to trade. "We don't rule out the possibility that Beijing will seek to increase yuan flexibility, but the shift in policy will likely be modest and highly dependent on market conditions".

For his part, Jeffrey Gundlach, known on Wall Street as the "Bond King", said on an investor webcast on Tuesday that if the 10-year Treasury yield pushes above 2.63 percent, it will accelerate higher.

Not only would such a step hurt China by decreasing the value of its bond holdings, it would wreak havoc in a global economy that the country is now fully integrated into through deep trade and financial links.

Brent has gained 5 percent since the beginning of the year, picking up from its late-year surge.

The BOJ maintained the amount of its bond purchases on Thursday, helping to soothe a market rattled by its reduction earlier this week.

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Rising yields mean lower prices, which in turn cut into returns for bond investors looking for capital appreciation.

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