January 10, 2018 / 7:14 PM / a year ago

CORRECTED-TREASURIES-U.S. 10-year yields highest since March on China bond holdings fears

 (Corrects seventh graph to show market reaction after auction)
    * China may slow or halt U.S. bond purchases -report
    * Ten-year yields highest since March
    * Treasury sells 10-year notes at highest yield since August

    By Karen Brettell and Kate Duguid
    NEW YORK, Jan 10 (Reuters) - U.S. Treasury yields jumped to
10-month highs on Wednesday after Bloomberg News reported that
Chinese officials have recommended the country slow or halt its
purchases of the U.S. bonds.
    China is the largest foreign holder of U.S. government debt,
with $1.19 trillion in Treasuries as of October 2017, according
to the Treasury Department.
    The Chinese officials, who were not named, said the market
for U.S. government bonds is becoming less attractive relative
to other assets, Bloomberg said. They also cited trade tensions
with the United States as a reason to slow Treasury purchases,
the report said.
    Analysts said the move may be a political signal, rather
than a policy-driven choice, citing the difficulties China would
have extricating itself from the market and finding new places
to invest. 
    “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,” said Guy LeBas, chief income strategist
at Janney Montgomery Scott LLC in Philadelphia.
    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.
    The 10-year notes pared price losses after the U.S.
auctioned $20 billion of reopened 10-year government bonds to
strong demand. 
    Indirect bidders were awarded 71.42 percent, the biggest
share of 10-year supply since the record high set in August
2016. Direct bidders took 6.5 percent with primary dealers at
22.0 percent.    
    "We suspect that the strength of the auction was primarily
fueled by short-covering. Normally these are short-term trades
that are bearish signals for the market," said a note by Thomas
Simons, a money market economist at Jefferies & Co. in New
    Benchmark 10-year note yields were last down to
2.564 percent, after peaking at 2.597 percent, the highest since
March 15.
    The yield curve between two-year notes and 10-year notes
 was last flatter at 58.6 basis points, after
steepening to 62.4 basis points earlier Wednesday.
    January 10 Wednesday 1:49PM New York / 1849 GMT
 US T BONDS MAR8               149-27/32    -0-12/32  
 10YR TNotes MAR8              122-236/256  -0-32/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.405        1.4296    -0.020
 Six-month bills               1.56         1.5942    -0.008
 Two-year note                 99-206/256   1.9765    0.008
 Three-year note               99-186/256   2.0946    0.004
 Five-year note                99-4/256     2.3359    0.012
 Seven-year note               98-140/256   2.4782    0.017
 10-year note                  97-80/256    2.5605    0.014
 30-year bond                  96-240/256   2.904     0.017
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        19.25        -0.25    
 U.S. 3-year dollar swap        17.75        -1.25    
 U.S. 5-year dollar swap         4.00         0.00    
 U.S. 10-year dollar swap       -2.00        -0.50    
 U.S. 30-year dollar swap      -21.75        -1.00    

 (Additional reporting by Sinead Carew; Editing by Chizu
Nomiyama and Steve Orlofsky)
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