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NEW YORK: US Treasury yields jumped to 10-month highs on Wednesday after Bloomberg News reported that Chinese officials have recommended the country slow down or halt its purchases of the US bonds.

China is the largest foreign holder of US government debt, with $1.19 trillion in Treasuries as of October 2017, data from the Treasury Department show.

The Chinese officials, who were not named, said the market for US government bonds is becoming less attractive relative to other assets, Bloomberg said. They also cited trade tensions with the United States as a reason to slow Treasury purchases, the report said.

The report comes amid increasing nervousness about bond weakness after the Bank of Japan said on Tuesday it will trim its purchases of Japanese government bonds, raising speculation it will reduce its monetary stimulus this year.

"People were already jittery about Treasuries," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York, noting the Chinese news is "piling on."

High profile bond investor Bill Gross of Janus Henderson Group also said on Twitter on Tuesday that bonds are in a bear market. Investors are also concerned that companies may reduce bond holdings if they repatriate funds from overseas following the passage of the US tax bill.

Benchmark 10-year notes  were last down 11/32 in price to yield 2.584 percent, after rising as high as 2.597 percent, the highest since March 15.

However, with China holding approximately $3 trillion in foreign exchange reserves, it was not clear what other markets would be large enough to invest in should China reduce its participation in the Treasury market, raising some speculation that the news may constitute some political bargaining.

"Where are you going to put it? Realistically I don't think they have much leeway here," said Kohli.

Underperformance by longer-dated debt on Wednesday was also attributed to the large number of investors that had bet on further curve flattening and had to reposition as the trade moved against them.

The yield curve between two-year notes and 10-year notes steepened to 62 basis points on Wednesday, and is up from a 10-year low of 49 basis points on Friday.

 

Copyright Reuters, 2018

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