By Karen Brettell and Kate Duguid
NEW YORK (Reuters) - U.S. Treasury yields jumped to 10-month highs on Wednesday after Bloomberg News reported that Chinese officials have recommended the country slow or halt its purchases of the U.S. bonds.
China is the largest foreign holder of U.S. government debt, with $1.19 trillion in Treasuries as of October 2017, according to the Treasury Department.
The Chinese officials, who were not named, said the market for U.S. 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.
Analysts said the move may be a political signal, rather than a policy-driven choice, citing the difficulties China would have extricating itself from the market and finding new places to invest.
“The reason that China holds Treasuries doesn’t have to do with their tactical trading and profit goals. China owns Treasuries because they export goods to the United States and they get dollars in exchange for those goods and they have to do something with those dollars. As long as China continues to export goods to the U.S. on that basis, they’ll need to invest dollars in something,” said Guy LeBas, chief income strategist at Janney Montgomery Scott LLC in Philadelphia.
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.
The 10-year notes pared price losses after the U.S. auctioned $20 billion of reopened 10-year government bonds to strong demand.
Indirect bidders were awarded 71.42 percent, the biggest share of 10-year supply since the record high set in August 2016. Direct bidders took 6.5 percent with primary dealers at 22.0 percent.
"We suspect that the strength of the auction was primarily fueled by short-covering. Normally these are short-term trades that are bearish signals for the market," said a note by Thomas Simons, a money market economist at Jefferies & Co. in New York.
Benchmark 10-year note (US10YT=RR) yields were last down to 2.564 percent, after peaking at 2.597 percent, the highest since March 15.
The yield curve between two-year notes and 10-year notes