"If China was to reduce their involvement in buying U.S. government debt, it would have a significant impact on interest rates, which is why I think we're seeing our banks lead the market lower today", said Christopher Conway, head of research and trading at Australian Stock Report. 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.
But why does China hold so much United States debt? "We have said many times in the past that these auctions are viewed as liquidity opportunities and today is no different", said Thomas Simons, senior money market economist at Jefferies.
Beijing is the biggest holder of U.S. debt and the news was seen by some as a veiled threat to President Donald Trump following his tough talk on global trade and, in particular, what he sees as China's unfair practices.
The $14 trillion Treasury market has been roiled in the past 48 hours.
"The dollar may fall to around ¥110" in the days to come, the official said. "I don't think we're headed for investment Armageddon".
U.S. Treasuries pared some of their losses, pushing down the 10-year yield to 2.544 percent from Wednesday's 10-month high of 2.597 percent, hit after a Bloomberg report that China is considering slowing or halting purchases of U.S. Treasury bonds. Trump is facing decision time as deadlines approach over whether to slap tariffs on imports from steel and aluminum to solar panels, which would be clearly aimed at China.
USD/JPY: Bank of Japan's Yield Curve Control Could Weigh
Bloomberg News estimates that the Chinese state now holds around $1.2 trillion in U.S. debt, an amount that has doubled over the last 10 years.
"If we posit that in September or October much of this doesn't go away but it stops increasing, then the pressure for slightly higher yields is probably with us", he said.
Later that month, Hu Xiaolian, director of China's SAFE, said Treasuries form "an important element of China's investment strategy for its foreign-currency reserves". "We don't rule out the possibility that Beijing will seek to increase yuan flexibility, but the shift in policy will likely be modest and highly dependent on market conditions".
BMO suggests buying 10-year Treasuries if yields climb to 2.6%.
The response fell short of a full-throated denial, and didn't push U.S. Treasury prices higher.
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. The benchmark 10-year yield touched 2.597 percent, its loftiest level since March, according to Reuters data.
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