Wall Street spooked by US-China trade tension

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Wall Street spooked by US-China trade tension

-China trade tensions, Bloomberg News reported on Wednesday.

China has the world's largest currency reserves, approximately $US3 trillion.

While it is conceivable that China could make some adjustments to its foreign reserve holdings, it seems "highly unlikely" that China will stop buying US Treasuries, said Stephen Innes, head of trading for Oanda in Singapore. The market for US government bonds is becoming less attractive relative to other assets, and trade tensions with the USA may provide a reason to slow or stop buying American debt, the thinking of these officials goes, according to the people, who asked not to be named as they aren't allowed to discuss the matter publicly.

They reportedly also referenced trade tensions with Washington as a reason to lower the pace of debt purchases.

USA markets ended lower on Wednesday as investors fretted about the possibility of China going slow on United States government bond purchase and the U.S. pulling out of the North American Free Trade Agreement.

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".

Ivascyn said shorter-dated U.S. Treasuries are "looking more interesting at these levels" and that Pimco "prefers (the) front end" of the U.S. Treasury yield curve.

Malpass, who heads worldwide affairs for Treasury, also reiterated his concerns about China's emphasis on its state-owned enterprises and government subsidies that distort capital allocation.

The financial market reaction to the Bloomberg report was swift. The People's Bank of China could also not be reached for comment outside business hours.

Again, this was a report citing anonymous government sources. Yields on 10-year Treasuries rose for a fifth day, touching the highest since March. The dollar regained some ground on Thursday, edging up 0.1 per cent to 111.54 yen.

China's central bank liquidated a record amount of USA government bonds in 2016 to stabilize its currency.

Still, many factors limit China's room for maneuver when it comes to Treasuries.

Is China really thinking of slowing or halting bond sales? And that fewer buyers will result in higher interest rates and borrowing costs in the U.S.

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. However, Innes said the uncertainty over China's stance could potentially dampen investors' risk appetite, while the dollar would likely face headwinds against the yen due to speculation about the Bank of Japan's future exit from its massive stimulus policy.

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