China Treasuries Unease Mostly Political Posturing, Analysts Say

(Bloomberg) -- While the Treasury market was roiled Wednesday by a report that Chinese officials are growing wary of U.S. debt, some analysts took Beijing’s message to be mostly political posturing amid escalating trade tensions with the U.S.

Senior government officials reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of Treasuries, according to people familiar with the matter.

China owns almost $1.2 trillion of U.S. government debt (not including Belgian holdings, which analysts say is home to Chinese custodial accounts), more than any other nation and double the level from a decade ago. But that massive stake is precisely what will keep the country from making any abrupt or radical moves, strategists say.

Here’s what they are saying about China’s intentions:

KEY VIEWS

• Deutsche Bank (Alan Ruskin, note)
  • China’s bark is likely worse than its bite on USTs; “given possible U.S. protectionist measures, it makes sense for China to preemptively flag that it holds some important cards”
  • Yet central banks value high-grade short and intermediate fixed-income assets and 5Y UST yields look “head and shoulders better” than alternatives
  • Because China holds so much in Treasures, any small action is likely to damage their existing stock of assets and overall portfolio
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• Jefferies (Ward McCarthy, Thomas Simons, note)
  • While China turning away from the U.S. bond market would complicate Treasury’s financing needs, U.S. statistics suggest “that China has not been a major buyer of Treasuries for a while now”
  • “Under normal circumstances, one would expect China to resume purchases of Treasuries at this point in order to prevent further appreciation” of the yuan
  • But with President Trump promising to take a tougher stance on trade with China, “Chinese officials may be trying to send a message that they have significant leverage in these talks”
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• Brown Brothers Harriman (Marc Chandler, note) 
  • While China is a “large and powerful” country, it can’t rebuild its reserves without buying foreign assets, and the U.S. offers the only major net new supply of core sovereign bonds
  • “The most pressing issue here is trade,” given the country’s growing trade surplus with the U.S. and failure to cooperate with the administration on North Korea to the extent Trump would have liked
  • China stepping away from Treasuries “is a proverbial shot across the bow to warn the American First administration”
• Rafiki Capital Management (Steven Englander, note)
  • “The best outcome for China would probably be if asset markets sold off short term (as is occurring), but bounce back when China recommits in statesmanlike fashion to being a steady hand in managing the global financial system”
  • For any Chinese threat to be credible, the market effect probably has to last more than six hours; “if there is a wave of market-close buying of assets, any future retaliation would have to be even stronger, and this would carry risks both to China and other countries”
• NatWest Markets (John Briggs, Brian Daingerfield, Blake Gwinn, note)
  • “The rate market reaction so far is correct, with bear steepening, but it is the prospect of substantially higher interest rates that hit equity markets, and the subsequent pressure on USD/JPY is weakening the USD”
  • The report is, at least partly, more political signaling than policy change; “the fact this news may be just a political tool makes me less worried in the long term, but actually more worried in the near term”
    • Doesn’t recommend fading the move as market disposition is in favor of steepeners and view is that Treasuries “very vulnerable” to correction already

--With assistance from Katherine Greifeld

To contact the reporter on this story: Alexandria Arnold in Seattle at abaca3@bloomberg.net.

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Boris Korby, Vivien Lou Chen

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