Gross calls bond bear market after Japan shock

The dollar temporarily rose above ¥111.80 after a Chinese government source said that the news report about Beijing's US debt purchases may have been based on wrong information.

Most market players expected the BOJ to avoid causing another shock in the market, especially after U.S. bond markets were shaken by a report that China, the biggest foreign holder of U.S. Treasuries, could slow or stop buying government bonds. Most recently, the yield has risen to 2.56 percent, a level not seen since March 2017.

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

"In our opinion, the news may quote the wrong source of information, or it may be fake news".

Bloomberg News did not immediately comment on the foreign exchange regulator's statement.

The yield on 10-year U.S. Treasury hit a 10-month high, while the dollar slumped against a basket of currencies following the Bloomberg News report.

SAFE officials noted that "the handling of China's foreign reserves investment in USA bonds is professionally managed according to market activity, on the basis of market conditions and investment needs".

US Treasury undersecretary David Malpass dismissed concerns about China's bond-buying intentions.

Economists say they expect China to continue to adjust its holdings of US government debt, considered to be the most liquid dollar assets, but few believe dumping US Treasuries is among policy choices to be considered by top leaders.

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The decision is based on the fact that other investments may offer better returns, but also on the mounting trade tensions between Beijing and Washington.

The $14 trillion Treasury market has been roiled in the past 48 hours. "There's no way on earth the Chinese stop buying US Treasuries", said Robert Pavlik, chief investment strategist, SlateStone Wealth in NY.

"The about to issue a whole lot more debt in an environment where the demand for that debt is about to go down", said Daniel W. Drezner, a professor of worldwide politics at the Fletcher School of Law and Diplomacy at Tufts University.

China holds the world's largest foreign-exchange reserves, at $3.1 trillion, and regularly assesses its strategy for investing them.

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 USA dollars due to its trade with the United States. The risk remains to the downside and move towards 1.1600 remains while below the highs of a year ago at 1.2095.

The greenback extended losses after data showed US producer prices fell for the first time in almost 1-1/2 years in December amid declining costs for services.

There were similar concerns around 11 months ago when China reduced its holdings of United States government debt in 2016 while it was trying to manage capital flight by intervening in the FX markets to support the Renminbi.

The country is also the biggest foreign holder of U.S. government debt, with US$1.19 trillion in Treasuries as of October 2017, according to data from the Treasury Department.

  • Rita Burton