China May Cut Back on Purchases of US Treasurys

The People's Bank of China (PBOC) has indicated it may curb its dollar buying, which could also mean a reduction in Chinese purchases of U.S. Treasurys.

China represents the largest foreign holder of Treasurys, with $1.29 trillion as of September, according to data from the Treasury Department. 

Chinese authorities have bought dollars in the past to restrain the yuan's appreciation and then used those dollars to buy Treasurys.

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But, "it's no longer in China's favor to accumulate foreign-exchange reserves," Yi Gang, a deputy governor of the PBOC, said in a speech Tuesday, Bloomberg reports. 

Treasurys could suffer if the Chinese curb their buying of them, which totaled $25.7 billion in September.

"If they are looking to reduce these purchases going forward, then you'd have to look at who the marginal buyer would be," Richard McGuire, a senior rate strategist at Rabobank, tells CNBC. 

"Together, with the Federal Reserve tapering its bond purchases, it has the potential to add to the bearish long-term outlook on U.S. Treasurys."

Chinese buying has likely subtracted 40 basis points from Treasury yields in recent years, 
Kit Juckes, head of foreign exchange strategy at Societe Generale, tells CNBC. 

If China diminishes its Treasury acquisitions, "yields won't shoot up, the curve is too steep for that," he explains. "But the chances of seeing 3 percent 10-year [Treasury] yields by Christmas have increased." The 10-year yield stood at 2.78 percent Thursday.

To be sure, "self-interest" dictates caution by China in any decision to taper its Treasury purchases, Neil Mellor, a currency strategist at Bank of New York Mellon. tells CNBC.

Given China's huge Treasury holdings it has an interest in keeping the bonds' prices high.

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