Chinese report hits dollar hard

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The Chinese officials, who were not named, said the market for US government bonds is becoming less attractive relative to other assets, according to the report.

Benchmark U.S. Treasury yields hit a 10-month high on Tuesday after the Bank of Japan tweaked its bond-buying programme, while stocks in world indexes continued their flying start to the year. The report suggests that China feels USA debt is becoming less attractive when compared to other types of investments. They also noted that trade tensions may provide a reason to reduce purchases.

Investors monitor stock prices in a brokerage house in Beijing on January 2, 2018. Greater fluctuations are in store "as this adjustment period comes in and as the bond markets settle down into what could be a new trading range", he said. "Any foreign country that has significant Treasury investments has a lot of leverage in this situation, the U.S.is going to be turning toward any buyer it can find".

Volatility in the Treasury market has sunk to a multidecade low, and that could have sweeping implications for the bond market this year.

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.

Oil prices extended gains, with USA crude futures hitting a three-year high on a tight supply balance due to OPEC-led production cuts and a sharper fall in US crude inventories.

But Ashworth noted that the move could serve as a warning that China could quickly shift USA borrowing costs higher if the Trump administration started a trade war with Beijing.

"If China were to do something that created uncertainties in the government securities markets, China is a major foreign holder of U.S. Treasuries, so it's deeply invested in that market" and wouldn't want to make any moves that could hurt its own position, Sheets said.

To contact the reporter on this story: Adam Haigh in Sydney at ahaigh1@bloomberg.net.

The U.S. 10-year note yielded 2.546 percent, the highest since March 15, while the 3-year note yield, which is sensitive to traders' views on Fed policy, was 2.074 percent, its highest since the instrument was reissued in 2007.

The Dow Jones Industrial Average fell 52.2 points, or 0.21 percent, to 25,333.6, the S&P 500 lost 6.67 points, or 0.24 percent, to 2,744.62 and the Nasdaq Composite dropped 32.02 points, or 0.45 percent, to 7,131.56.

Reduced asset purchases by the world's top central banks, rising commodity prices and looming United States debt sales all support the case for higher bond yields, but until now they have proved resilient. "All those people that would have had that trade on are stopped out", he said.

Brent crude rose 0.4 percent to $69.25 per barrel, staying near its highest level since mid 2015.

"This happens every time rates go up", Paulsen explains.

Analysts also said the rise in yields across the board is fuelling speculation as to whether this is the start of a sustained bear market for bonds.

The U.S. dollar fell to a more than six-week low against the Japanese yen and weakened against a basket of major currencies on Wednesday after a report that China was ready to slow or halt its U.S. Treasury purchases.

"Would the Chinese risk losing their investments in the USA market to make a political statement, particularly when their holdings are most likely targeted for broader investments in the US?" says Quincy Krosby, chief market strategist at Prudential Financial.

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