China: 'We will not halt U.S. bond purchases'

Stock Rally Tested by Rise in Yields; Yen Climbs: Markets Wrap

Pimco, one of the world's biggest money managers, sees this week's USA bond market selloff as a buying opportunity and is not ready to call the spike in 10-year Treasury yield to a nine-month high a bear market precursor.

"China's rising foreign exchange reserves, and our view of United States dollars depreciation, suggests China's purchases of USA treasuries will either pick up, or more likely, remain stable", say Grace and Haddad.

And while the U.S. Federal Reserve has been slowly tightening policy over the last two years, traders have been repricing market expectations of when Europe and Japan will follow suit.

"If the PBOC were to precipitate a large sell-off by retreating from the US Treasury market, the value of its existing reserve would fall". It is also the biggest foreign holder of US government debt, ahead of Japan, and held US$1.189tn worth of US Treasuries in October, according to US Treasury Department data.

Brent crude futures LCOc1 settled 6 cents higher at $69.26, after hitting $70.05 during the session, its highest level since November 2014.

With the euro zone seeing its best growth in a decade, the European Central Bank should gradually shift its stance to avoid a more disruptive move later and look at a broader revision of its policy guidance to reduce the focus on bond purchases and raise the emphasis on interest rates, accounts of the ECB's December meeting showed.

WALL STREET: U.S. stocks finished lower on Wednesday.

The dollar then rallied and was up 0.4 percent against the yen, although the USA currency is still down more than 1 percent against the yen this week after markets bet the Bank of Japan (BoJ) could start to tighten monetary policy faster than expected.

Buying Treasuries keeps the dollar stronger relative to the yuan, which has helped Chinese exports in the past. As in 2009, the latest news fanning concern about China's appetite for USA borrowings comes at an inopportune time, with the Treasury set to ramp up issuance as the Federal Reserve is shrinking its balance sheet. "What that means is interest rates are about to go up". However, we believe USA inflation pressures are picking up.

In the eyes of some, Chinese officials may be trying to send a message that they have leverage with President Trump talking tough on trade. His administration could impose tariffs on imports of steel, aluminum and solar panels, which would hurt Chinese manufacturers. "That helps explain the demand picture which has oil up at $70", said Scott Clemons, chief investment strategist at Brown Brothers Harriman, in NY.

What would it cost China?

"China's showing that they have power in the relationship, as anyone who's a buyer of U.S. Treasuries does", said Eric Stein, co-director of global fixed income at Eaton Vance in Boston.

China has favored a weaker yuan in the past, but its focus recently has been on keeping its currency stable.

"The bear market that I'm talking about is a mild one", Gross said in a Bloomberg Radio interview.

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