January 11, 2018 / 3:10 PM / 7 months ago

TREASURIES-Selloff ebbs as China disputes U.S. bond holdings report

    * China disputes bond holding report
    * ECB indicates may change policy message
    * Benchmark yields hover near 10-month highs

    By Kate Duguid
    NEW YORK, Jan 11 - Treasury yields fell early Thursday
morning after China disputed a report that its government
officials had recommended the country slow or halt its purchases
of the U.S. bonds.
    China is diversifying its foreign exchange reserves in order
to safeguard their value, the country's currency regulator said
on Thursday, while dismissing a media report about its purchases
of U.S. debt.
    The Bloomberg News story published Wednesday lifted yields
on the 10-year government bond to a 10-month high as traders
sold off their holdings. 
    Despite the selloff, some analysts had their doubts about
the story, citing China's ability to extricate itself from the
market and the dearth of good investments in the global low-rate
environment.
    "It didn't seem to make a whole lot of intuitive sense to us
that the biggest holder of Treasuries, excluding the Fed, would
say that they’re not buying," said Gennadiy Goldberg, interest
rates strategist at TD Securities in New York. 
    He continued, "To some extent it does suggest that the
market is very jittery about potential sources of demand."
    Though yields were lower on Thursday morning, they did not
reverse all of the gains made Wednesday, remaining near their
highest level since March 2017.
    Hawkish European Central Bank (ECB) minutes helped bring
yields off their lows. The ECB said it should revisit its policy
message in early 2018 and gradually adjust its language to
reflect improved growth prospects, the minutes showed.

    Nervousness about reduced central bank accommodation put
pressure on bonds this week, after the Bank of Japan said on
Tuesday it will trim its purchases of Japanese government bonds.

    Investors are next focused on Friday's Consumer Price Index.
"Inflation is the lynchpin for the global outlook this year,"
said Goldberg. 
    With inflation still well below the Federal Reserve's
2-percent target, investors are watching for any sign of a pick
up. 
    Bond yields fell slightly on Thursday after data showed U.S.
producer prices fell for the first time in nearly 1-1/2 years in
December amid declining costs for services.
    The market will also be watching for remarks about inflation
in a speech by William Dudley, president of the New York Fed, at
3:30 p.m. ET (2030 GMT). 
    At 9:30 a.m. ET (1330 GMT), 10-year yields were
2.559 percent, down from the high of 2.597 percent hit
Wednesday, the highest level since March 15.   

    January 11 Thursday 9:34AM New York / 1434 GMT
                               Price                  
 US T BONDS MAR8               149-27/32    -0-7/32   
 10YR TNotes MAR8              122-244/256  -0-12/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.4025       1.427     0.003
 Six-month bills               1.55         1.5839    0.000
 Two-year note                 99-206/256   1.9766    0.005
 Three-year note               99-190/256   2.0892    0.000
 Five-year note                99-12/256    2.3292    0.002
 Seven-year note               98-144/256   2.4758    0.006
 10-year note                  97-84/256    2.5587    0.010
 30-year bond                  96-248/256   2.9024    0.011
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        19.50         0.25    
 spread                                               
 U.S. 3-year dollar swap        18.00         0.25    
 spread                                               
 U.S. 5-year dollar swap         4.00         0.25    
 spread                                               
 U.S. 10-year dollar swap       -2.00         0.00    
 spread                                               
 U.S. 30-year dollar swap      -22.00        -0.50    
 spread                                               
 
 (Reporting by Kate Duguid; Editing by Nick Zieminski)
  
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