Asian Shares Weaken on Trade Worries, Bonds Recover as China Rebuts Report

A broker looks at a graph on his computer screen on the dealing floor at ICAP in London

The yield on 10-year US Treasury hit a 10-month high, while the dollar slumped against a basket of currencies following the Bloomberg News report. As in 2009, the latest news fanning concern about China's appetite for US borrowings comes at an inopportune time, with the Treasury set to ramp up issuance as the Federal Reserve is shrinking its balance sheet.

A possible slow-down or halt to China purchasing US Treasury yields could have significant repercussions. "So it could be used as a "one stone killing two birds", which provides the Trump administration with pressure on both the markets and trade fronts", she said. "It's challenging to find any real substantial alternatives", with China earning dollars - the flip side of the US current account deficit.

Beijing is the biggest holder of U.S. debt and the news was seen by some as a veiled threat to President Donald Trump following his tough talk on global trade and, in particular, what he sees as China's unfair practices. The increase came as the size of the US debt market more than tripled to $14.5 trillion.

A fire sale would also hit the value of China's vast Treasury holdings and may even end up weakening the yuan against the dollar, experts say. "I don't think we're headed for investment Armageddon". It isn't clear whether the recommendations of the officials have been adopted, Livemint reported.

Reports that China may slow its purchases of USA government bonds weighed on investor sentiment.

Later that month, Hu Xiaolian, director of China's SAFE, said Treasuries form "an important element of China's investment strategy for its foreign-currency reserves".

"The dollar was already notably weak ahead of today, despite the fact that US data remained strong and yields continued to rise", said Boris Schlossberg, managing director of FX strategy at BK Asset Management in NY.

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Ant Financial is an affiliate of Chinese e-commerce giant Alibaba Group Holding, which owns the South China Morning Post.

"We don't see a material impact on the United States dollars, and our view is for further USD depreciation as the global economy picks up and "other" central banks look toward tightening their monetary policies", Grace and Haddad say.

The retail sector was mixed after the Australian Bureau of Statistics said sales rose 1.2 per cent in November, driven by the release of the iPhone X and promotions such as Black Friday.

Some market experts speculate that China might want to send a message to President Trump over trade.

"You could be long dollar-yen and you could be long USA treasuries and you were getting yield on both sides of that".

Not only would such a step hurt China by decreasing the value of its bond holdings, it would wreak havoc in a global economy that the country is now fully integrated into through deep trade and financial links.

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