January 10, 2018 / 1:59 PM / a year ago

TREASURIES-Benchmark yield highest since March on fears over China bond purchases

    * China may slow or halt U.S. bond purchases - report 
    * Yield curve steepens as long-end underperforms

    By Karen Brettell
    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 down 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, data from
the Treasury Department show.
    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.             
    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.”
    High profile bond investor Bill Gross of Janus Henderson
Group also said on Twitter on Tuesday that bonds are in a bear
market. Investors are also concerned that companies may reduce
bond holdings if they repatriate funds from overseas following
the passage of the U.S. tax bill.
    Benchmark 10-year notes             were last down 11/32 in
price to yield 2.584 percent, after rising as high as 2.597
percent, the highest since March 15.
    However, with China holding approximately $3 trillion in
foreign exchange reserves, 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 Kohli.
    Underperformance by longer-dated debt on Wednesday was also
attributed to the large number of investors that had bet on
further curve flattening and had to reposition as the trade
moved against them.
    The yield curve between two-year notes and 10-year notes
               steepened to 62 basis points on Wednesday, and is
up from a 10-year low of 49 basis points on Friday.

 (Editing by Chizu Nomiyama)
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