January 10, 2018 / 4:57 PM / a year ago

TREASURIES-Ten-year yields highest since March on China bond holdings fears

 (Adds quotes, updates prices)
    * 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 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.             
    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 2.589 percent, after peaking at 2.597 percent,
the highest since March 15.
    China's potential pullback comes as the Federal Reserve also
reduces its bond holdings. 
    "You're taking two big buyers out of the market. That's the
problem," said Bruce Bittles, chief investment strategist at
Robert W. Baird & Co in Sarasota, Florida.
    It also comes as the Treasury Department is expected to
increase its issuance, which could further raise the cost for
the United States to issue debt.
    “Treasury financing needs are going to rise significantly in
2018,” said Thomas Simons, a money market economist at Jefferies
in New York. “China turning away from the market potentially
makes Treasury’s job harder.”
    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 and Steve Orlofsky)
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