Treasury yields are rising and bond-related exchange traded funds are falling after the Bank of Japan revealed its intention to scale back its monthly bond purchases Tuesday and Chinese officials recommended slowing U.S. treasury purchases Wednesday.
The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) was flat Wednesday after paring early loses, which follows a 0.5% decline in the previous session. Meanwhile, yields on benchmark 10-year Treasuries were now hovering around 2.55%, its highest level since March 2017.
Treasury bond traders remained anxious Wednesday after senior government officials in Beijing reviewed the nation’s foreign-exchange holdings and recommended slowing or halting U.S. Treasury bond purchases, Bloomberg reports.
“With markets already dealing with supply indigestion, headlines regarding potentially lower Chinese demand for Treasuries are renewing bearish dynamics,” Michael Leister, a strategist at Commerzbank AG, told Bloomberg. “Today’s headlines will underscore concerns that the fading global quantitative-easing bid will trigger lasting upside pressure on developed-market yields.”
The China speculation comes as global debt markets were already weakening amid signs that central banks are easing bond-purchasing stimulus programs.
For instance, the Bank of Japan said Tuesday it would scale back its monthly bond purchases of 10-to-25 year debt by ¥10bn to ¥190bn, which was the first reduction in the sector since December 2016, the Financial Times reports.
“Generally speaking, reductions are not a huge shock as it seems pretty clear that the adoption of yield curve control from September 2016 was done with an aim of slowly reducing purchases,” Steve Barrow, head of G10 research at Standard Bank, told FT. “However, in light of the fact that BoJ governor [Haruhiko] Kuroda has spoken a lot recently about the difficulties for the financial sector from the prolonged period of low rates, there has been some speculation that the BoJ is moving slowly towards tighter policy. Some have even speculated that this could mean higher rates as soon as this year, at least in terms of the 0 per cent 10-year target, if not the minus 0.1 per cent target for short rates.”
Meanwhile, on the supply side, the U.S. government is expected to increase sales of Treasuries, which may further dampen prices. The U.S. Treasury Department maintained longer-term debt sales for the seventh quarter at $62 billion and anticipates an increase in coupon-bearing securities n February to meet funding needs, according to Bloomberg.
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