Treasurys Tumble, Futures Slide On Report China "To Slow Or Halt" Treasury Purchases

The treasuries complex has sold off aggressively across the curve after the following flashing red Bloomberg headline:

- CHINA OFFICIALS ARE SAID TO VIEW TREASURIES AS LESS ATTRACTIVE.
- CHINA OFFICIALS SAID TO RECOMMEND SLOWING OR HALTING TSY BUYING

As Bloomberg reports, "Officials reviewing China’s FX holdings have recommended slowing or halting purchases of US Treasuries, according to people familiar with the matter."

The reasoning given is that the market for US government bonds is becoming less attractive relative to other assets, while trade tensions with the US may provide a reason to slow or stop buying American debt.

As Bloomberg further notes "The people didn’t specify why trade tensions would spur a cutback in Treasuries purchases, though foreign holdings of US securities have sometimes been a geopolitical football in the past."

The news has been interpreted as Beijing wanting to send a signal to the US that it is willing to use financial means to respond to any shifts in US policy on issues such as trade.

Amusingly, with the GOP selling out, at least one deficit hawk remains: China.

The investment strategies discussed in China’s review don’t concern daily purchases and sales, said the people. The officials recommended that China closely watch factors such as the outlook for supply of U.S. government debt, along with political developments including trade disputes between the world’s two biggest economies, when deciding whether to cut some Treasury holdings, the people said.

While there is no official confirmation, this understandably has fixed income spooked. China is the single biggest foreign holder of Treasuries with $1.2 trillion in notional, so this report - if true - has massive implications.

 

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As a consequence, US yields have more than retraced intraday losses, with the 30y trading to 2.92% and the 10y up 2bps. The rest of fixed income has followed through, with a similar spike in European yields.

The kneejerk reaction in fixed income was fast and furious, as over 35,000 10-year futures traded in the one-minute period after the news broke according to Bloomberg, sending 10Y yields as high as 2.59%, the highest since March 2017.

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As a reminder, according to Jeff Gundlach once  the 10Y hits 2.63%, not only is the selloff set to accelerate, it is also the level where the selling in TSYs finally hits equities too.

The news has also hit U.S. stock-index futures which have tumbled on the news, following declines in Europe.

•    E-Mini futures on S&P down 0.4%
•    E-Mini futures on Dow Jones down 0.4%
•    E-Mini futures on Nasdaq 0.5% lower
•    S&P 500 up 0.1% Tuesday, rising for 6th day to a fresh record
•    VIX Index trading 1.8% higher

Meanwhile, the USD is selling off across the board following the sharp move lower in Treasuries, and FX markets are now responding. This has been perceived as a USD negative development, and as such the greenback is on sale.  The Bloomberg Dollar index, BBDXY extends its drop and falls as much as 0.5% to 1,151.90.

As Bloomberg notes, the dollar initially pared losses on knee-jerk reaction to news that officials reviewing China’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries. However, it then quickly lost momentum and deepened its losses for the day even as 10-year U.S. Treasury yield rose to fresh high at 2.5917% after a report saying China may be looking to change its FX reserves strategy.

EUR/USD snaps a three-day decline, trades near 0.6% higher at 1.2011, jumping almost 70 pips while the CHF has rallied 40 pips, although as some desks note, volumes remain low; liquidity may be exacerbating extent of recent move.

USD/JPY remains offered, drops by as much as 1.2% to 111.30, the most since May 17 and at the lowest level since Nov. 28.

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Of course, for the USD, the Fed's normalization process will naturally be affected, as monetary conditions will tighten and as noted above, has seen the USD falling away against all of its counterparts, with the heavily trade weighted EUR/USD rate swiftly back to 1.2000, but contained here for now. 

The only asset which has welcomed the news so far, is gold.

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Some notes of caution on the news here from Citi's trading desk, which notes that it is not surprising that the knee-jerk reaction has been lower in USD. However, it brings up the following three points:

1. Sourcing on the Bloomberg article is unclear, citing only ‘Officials reviewing China’s foreign-exchange holdings’. Comments to this effect in the past have sometimes come from officials outside the main policymaking circles. As a theme, this is not surprising, but given unclear sourcing, this may not signal imminent shifts in policy.

2. It is hard to shift holdings. Shifts in reserves portfolios are tectonic and this partly comes down to the fact that USD selling by sovereigns reinforces broad downward pressure on the dollar, which can run counter to bigger policy aims. It is clear that the long-term trend is towards reductions of overweight USD positions among sovereigns, but in practice shifts are by several percent over several years. Indeed, the only way to begin a very rapid shift in holdings might be to abandon previous exchange rate policy entirely, but this looks unlikely.

3. Foreigners (overall) have already been paring back on purchases of Treasuries relative to other securities for some time but this has not always been well correlated with USD moves.

USD could extend its losses simply on the basis of the tailwind for losses in the broader macro-environment, but we do not view these comments by Chinese authorities as a convincing catalyst in and of themselves. Indeed, if there is any lasting signal from the comments it is that tensions around trade and financial issues may be ratcheting up and we view this as risk negative. This means that currencies such as EUR may outperform risky currencies should market focus on this issue persist.

 

Comments

eclectic syncretist 07564111 Jan 10, 2018 7:48 AM Permalink

"the market for US government bonds is becoming less attractive "

Gee, Ya think??!!! I mean with the Fed having initiated a program that will dump an additional $2,300,000,000,000+ of UST on the "market", above and beyond what will be dumped to finance the ongoing exploding debt load?? China doesn't want to take the other side of that trade???? Who woulda thunk it? They decided they can't out-earn the printing press.

In reply to by 07564111

YUNOSELL eclectic syncretist Jan 10, 2018 8:14 AM Permalink

Not only that -- China doesn't want to fund the USA's military which they see as will eventually be turned on them! Let's pay the country that labeled us an economic aggressor in their NSS to fund the war against us, LOL. 

Strange coincidence that Trump last night announces how the US will revamp and modernize their Nuclear missiles and then China announces this, next day and only a week before they launch the Shanghai Energy Exchange to directly compete with the Petrodollar selling oil future contracts in Yuan!

 

 

In reply to by eclectic syncretist

veritas semper… 07564111 Jan 10, 2018 12:03 PM Permalink

Petro Golden Yuan coming. Versus the petro-f*cking-dollar.

Winning!(for China)

Very important news (especially for the Trump fan club,maybe they'll be able to finally see the light ):

-*****Victoria Nuland(remember FU EU and Ukraine cookie cutter and many other Khazarians foreign f*ck ups?)=Nudelman Kagan and Robert Work were appointed as Senior Counselors for Defense!!!!

This is called "continuity of Government,the REAL government",people. They have been in high positions of power since the Clinton administration.

Any other questions about who The Donald serves?

I'm waiting for comments from the Donald's fan boys.

-SAA is wiping out AlQaeda in Idlib.Moving very,very quick.Creating cauldrons and cutting the main supply lines. kudos!

In reply to by 07564111

Buck Johnson Fiat Burner Jan 10, 2018 7:55 AM Permalink

The US will, you see they will open up private LLC's and such offshore in the islands and other places and use them to buy US treasuries without having to tell who is doing it.  Essentially the treasury is buying the US treasuries but using a cutout to hide the fact that they are.

In essence printing money. But many know this already but they overlook it because there isn't any other option right now for another type of reserve currency/economy.

 

In reply to by Fiat Burner

GoldToDaMoon Jan 10, 2018 6:18 AM Permalink

Treasury holdings are a sensitive issue... Japanese Prime Minister Ryutaro Hashimoto spooked the markets, being blamed for a 2.5 percent drop in the Dow, when he said on 23rd June 1997:

"There are many countries in the world which conduct the management of their foreign exchange reserves in Treasuries. These countries continue to hold on to those Treasuries, even when the dollar plummets. And to some extent, it is this continued holding of Treasuries which supports the U.S. economy."

J J Pettigrew Jan 10, 2018 6:23 AM Permalink

The National Debt Chart and the Stock Market have the same trajectory. How long can this go on?

China not buying, the Fed attempting to trim their balance sheet, the federal government cant stay open without special resolutions, ........Amazon has a P/E ration of over 300.......and the rules for getting a mortgage are being eased up.....

what's the problem......

Algos dont care.......

Ricki13th Jan 10, 2018 6:23 AM Permalink

Lmao and so it begins China starts dumping worthless US debt. 2018 is the year of the crash people. This melt up will reverse sometime this year as countries run from the dollar.