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China officials recommend slowing or halting US bond purchases

[LONDON] Officials reviewing China's vast foreign-exchange holdings have recommended slowing or halting purchases of US government bonds, seeing the market for them as becoming less attractive, Bloomberg News said on Wednesday.

The report helped push yields of US Treasuries to multi-month highs and caused the US dollar to fall.

China has the world's biggest currency reserves, approximately US$3 trillion, and is the biggest foreign holder of US government debt, with US$1.19 trillion in Treasuries as of October 2017, data from the Treasury Department show.

The Bloomberg report, which cited people familiar with the matter, quoted the sources as saying the market for US government bonds is becoming less attractive relative to other assets. They also cited trade tensions with the United States as a reason to slow Treasury purchases, the report said.

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Bloomberg said the Chinese officials did not specify why trade tensions would cause a cutback in Treasuries purchases, but it said foreign holdings of US securities have sometimes been a geopolitical football in the past.

China's State Administration of Foreign Exchange did not immediately respond to a faxed request for comment on the Bloomberg report. The People's Bank of China could also not be reached for comment outside business hours.

In Washington, a US Treasury Department spokesman could not immediately be reached for comment.

Major government bond yields extended earlier gains after the report. The yield on 10-year US Treasury hit a 10-month high of 2.59 per cent in European trade and was up 4 basis points on the day, pushing the dollar to a six-week low against the Japanese yen.

"The latest rise (in yields) is caused by the news that Chinese officials are recommending lower purchases of US Treasuries for their FX reserves," said Mizuho strategist Antoine Bouvet, referring to the Bloomberg report.

The report comes amid increasing nervousness about bond weakness after the Bank of Japan said on Tuesday it will trim its purchases of Japanese government bonds, raising speculation it will reduce its monetary stimulus this year.

"People were already jittery about Treasuries," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York, noting the Chinese news is "piling on." It was not clear what other markets would be large enough to invest in should China reduce its participation in the Treasury market, raising some speculation that the news may constitute some political bargaining.

"Where are you going to put it? Realistically I don't think they have much leeway here," said Mr Kohli.

China uses its holdings of foreign currency bonds to keep its currency at the rate where it wants it, and given this desire for stability, there might not be much room for maneuver on the composition of its reserves.

REUTERS