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Bond yields spike as China questions U.S. treasuries

13 January 2018

MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.3 percent, slipping further from Tuesday's 10-year peak. U.S. gold futures for February delivery settled up $US5.60, or 0.4 per cent, at $US1,319.30 per ounce.

The report, which Bloomberg News published on Wednesday, suggested that China's State Administration of Foreign Exchange (SAFE) had recommended slowing or halting purchases of the USA government bonds, citing reasons that included investment alternatives and trade tensions with the U.S.

Calm was restored after China's state foreign exchange regulator said it could be "fake" news.

The dollar rose against its Canadian counterpart and and Mexico's peso after a Reuters report said Canada increasingly believes that U.S. President Donald Trump will soon announce his intention to withdraw from the North American Free Trade Agreement treaty.

But the episode showed how sensitive markets, particularly bond markets, are to the prospect of China stepping back from US debt and what that mean for the bull run.

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Janus Henderson's Bill Gross has Tweeted a "bond bear market has been confirmed" as the ten-year US Treasury yield climbed to the highest level in around ten months. The VIX implied volatility index, the markets' so-called "fear gauge", hovered just above 10 on Thursday, from as low as 8.92 on January 2.

United States markets had their first uniformly negative session of the year so far yesterday, all of the main benchmarks finishing the day lower on the day, on reports that China was reviewing its policy of buying USA treasuries.

The analysts said in the note a global recovery and potential central bank action are possible drivers of a sustained sell off in bonds, though they stopped short of saying that this trend has begun.

"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.

A separate probe into Chinese intellectual property practices may also conclude as early as this month, Axios reported, and could result in tariffs on the country's consumer-electronics exports. "It's challenging to find any real substantial alternatives", with China earning dollars - the flip side of the USA current account deficit.

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The dollar index .DXY fell 0.44 percent, with the euro EUR= up 0.7 percent to $1.2029.

The knee-jerk reaction for bond-bears was to sell bonds, but a strong U.S. treasury auction and cool analysis from some strategists prompted a turnaround.

The US dollar weakened against several currencies, with the Australian dollar rising 0.2 per cent to 78.4 US cents.

China owns nearly $1.2 trillion of US government debt, more than double the level from a decade ago, with most of the buildup coming as the nation boosted foreign-exchange reserves to help offset a strengthening yuan.

Platinum was up 0.9% at 973.60 oz, after hitting a 4-month high at 973.90.

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Brent crude rose 0.5 per cent to $US69.15 per barrel, staying near its highest level since mid 2015.

Bond yields spike as China questions U.S. treasuries