China’s treasury holdings: Seismic shift or just a sabre rattle? - TDS

Bloomberg comments suggesting China may be considering slowing or halting U.S. Treasury buying highlight a potential risk to the USD and upside pressure on Treasury yields, according to analysts at TDS.

Key Quotes

“However the context of the headlines remain incomplete, and it is unclear as to whether this represents political positioning, or a practical reserves management decision.”

“Rates: Given how much duration has been absorbed by China over the last year, the bear steepening reaction was intuitive. However, fundamentals don’t justify higher rates and we don’t see China significantly reducing their purchases of Treasuries. We take off our short duration trade via 3m10y payer spreads.”

“FX: We remain cautious on these headlines, but a reallocation out of USD in China’s FX reserves would represent a game changer for FX markets. If confirmed, the reduced USD accumulation this would imply would add to the structural headwinds the dollar already faces in 2018 – and beyond.”