China added to bond investors' jitters on Wednesday as tradersbraced for what they feared could be the end of a three-decade bullmarket.

Officials in Beijing reviewing the nation's foreign-exchangeholdings have recommended slowing or halting purchases of U.S.Treasuries, according to people familiar with the matter.Benchmark bonds reversed earlier gains on the news, with the yieldon 10-year Treasuries climbing for a fifth day.

China's foreign-exchange reserves of $3.1 trillion are theworld's largest, though it wasn't clear whether the recommendationshave been adopted. The market for U.S. government bonds is becomingless attractive relative to other assets, and trade tensions withthe U.S. may provide a reason to slow or stop buying American debt,the thinking of these officials goes, according to the people, whoasked not to be named as they aren't allowed to discuss the matterpublicly. China's State Administration of Foreign Exchange didn'timmediately reply to a fax seeking comment on the matter.

“With markets already dealing with supply indigestion, headlinesregarding potentially lower Chinese demand for Treasuries arerenewing bearish dynamics,” said Michael Leister, a strategist atCommerzbank. “Today's headlines will underscore concerns that thefading global quantitative-easing bid will trigger lasting upsidepressure on developed-market yields.”

The Chinese officials didn't specify why trade tensions wouldspur a cutback in Treasuries purchases, though foreign holdings ofU.S. securities have sometimes been a geopolitical football in thepast. The strategies discussed in the review don't concern dailypurchases and sales, said the people. The officials recommendedthat the nation closely watch factors such as the outlook forsupply 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 peoplesaid.

The yield on 10-year Treasuries was four basis points higher at2.59% as of 12:16 p.m. in London, reversing a decline to 2.54%earlier Wednesday. The rate on comparable bunds was one basis pointhigher at 0.53%.

Any reduction in Chinese purchases would come just as the U.S.prepares to boost its supply of debt. The Treasury Department saidin its most recent quarterly refunding announcement in Novemberthat borrowing needs will increase as the Federal Reserve reducesits balance sheet and as fiscal deficits look set to widen.

“It's a complicated chess game as with everything the Chinesedo,” said Charles Wyplosz, a professor of international economicsat the Graduate Institute of International and Development Studiesin Geneva. “For years they have been bothered by the fact that theyare so heavily invested in one particular class of U.S. bonds, soit's just a question of time before would try to diversify.”

Some investors said that the market could take the China news inits stride considering the nation's net purchases of Treasurieshave already slowed “significantly.”

“If China ceases to be a net purchaser of U.S. Treasuries, thisis unlikely to have a significant impact on the overall yield curveunless China divests a large share of its total holdings in a shorttime period,” said Rajiv Biswas, Singapore-based chief Asia-Pacificeconomist at IHS Markit.

Yields were already climbing this week amid expectations theimproving global economy will boost inflation pressures round theworld, just as major central banks scale back their assetpurchases.

Markets are also braced for a deluge of debt supply thisweek. The U.S. is scheduled to reopen $20 billion of 10-yeardebt later today, followed by $12 billion of 30-year bonds onThursday. Germany sold 4.03 billion euros of 0.5% 10-year bonds onWednesday, with syndications in Italy and Portugal to follow.

From: Bloomberg News

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