Gold Up on Report China May Slow US Treasury Buys

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China had $1.19 trillion in Treasuries as of October 2017, data from the Treasury Department show.

Still, many factors limit China's room for maneuver when it comes to Treasuries. As long as the country runs a massive trade surplus with the US, it will find itself with a huge hoard of dollars looking for a home.

China uses its holdings of foreign currency bonds to keep its currency at the rate where it wants it, and given this desire for stability, there might not be much room for maneuver on the composition of its reserves.

LONDON: Speculation that China may cut or even halt its purchases of US Treasurys weighed on European stock markets on Wednesday, while Britain's key index rose, hitting a new record close. That is not an outcome that would appear to be palatable politically or for economic reasons.

Some investors said that the market could take the China news in stride, considering the nation's net purchases of Treasuries have already slowed "significantly". Ten-year US Treasuries yields are more than 200 basis higher than those on comparable German Bunds.

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That 10-year yield level Gundlach referred to was a level last seen a day before the Federal Reserve raised interest rates at its March 14-15 policy meeting.

"I think the Chinese will contribute to the removal of liquidity from the USA bond market", said Michael Shaoul, chairman and CEO of Marketfield Asset Management.

Is China just sending a signal to the United States?

The main reasons for this concern U.S. trade relations with China, Canada and Mexico. Some economists and China followers believe the report, which cited people familiar with the matter, could have been intended as a warning shot to the U.S. administration.

The administration is considering several new tariff moves in the coming weeks, including broad restrictions on steel and aluminum imports and punitive actions against China arising from an investigation into Beijing's intellectual property practices.

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The US trade deficit with China rose to US$344.4 million in January-November previous year from US$319.3 million in the same period in 2016.

For his part, Jeffrey Gundlach, known on Wall Street as the "Bond King", said on an investor webcast on Tuesday that if the 10-year Treasury yield pushes above 2.63 percent, it will accelerate higher.

Any reduction in Chinese purchases would come just as the US prepares to boost its supply of debt.

If China retreats, would other buyers step in? They are also in demand by banks to meet regulatory requirements relating to liquid asset holdings, and they can be used as collateral to back trades including derivatives positions.

Treasuries benefit from their relative safety and liquidity compared with other assets.

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