What’s at stake if the China comments come to fruition?
First of all, lets get some perspective. China has said they may start slowing or halting US bond buying. That’s a big step from actually selling up but that hasn’t stopped the market from doing so, and that will be the next conclusion made. Straight after the China news, 205k in T-notes were sold off the bat. No-one will want to be long US bonds if there’s even a hint of them selling out.
What’s at stake?
The latest TIC data (Treasury International Capital data) out in Dec (for Oct movements) showed that the Chinese held $1.189tn in US securities, up from $1.181tn. That was up from $1.116tn in the same period for 2016. Between them and the Japanese, they hold around two fifths of US Treasuries. The numbers are staggeringly way out ahead of the other major foreign holders.
That shows why it’s such a big deal if China starts making waves about anything to do with their holdings. It’s also a very big stick they are holding over the US, and the US knows it. Of course, if China was to get serious about stopping or even selling up, they would create just as much carnage for themselves, as they would on markets.
But again, let’s not get carried away by this news. This has caught the bond at a bad moment when it’s already a little jumpy and when bonds were selling off anyway, so the news has just magnified things somewhat. I still believe that this is just a bit of chest beating from China, and I’m still sceptical about the fact that it’s Bloomers who have delivered this “sources” story.
Moving forward to trading, it’s easy to get caught up in the hype and get into trades at tops of bottoms thinking this is the start of something big. It may be, it may be not, so before getting carried away, make sure you let the price action be your guide. An 80 pip move up in cable and the euro is reflective of the markets real view of this news and nothing more. If the market really thought this news had any real standing, we’d be talking about 200+ pip moves right now. Go with the flow if that’s your bag but keep to the levels in play and make sure your positions are tight and manageable.