By Sara Sjolin, MarketWatch
A report that China may reduce its purchases of Treasurys struck panic into the bond market earlier in the trading session.
U.S. Treasury yields gave back some of their earlier climb on Wednesday after a strong bond auction helped to reaffirm appetite for government paper following an earlier report that China was considering halting or reducing its purchases of U.S. government paper.
What are Treasurys doing?
The yield for the 10-year benchmark note rose 0.9 basis point to 2.551%, after having risen as high as 2.597%.
The yield on 30-year bonds added 1 basis point to 2.893%, while the rate on two-year paper was slightly higher at 1.972%, compared with 1.968% on late Tuesday, according to WSJ Market Data.
Yields rise when bond prices fall.
What is driving the market?
U.S. yields had already started to rise on Tuesday after the Bank of Japan cut its bond purchases, sparking chatter that the Japanese central bank is getting ready to end years of ultraloose monetary policy. That sent the 10-year rate above 2.5% and to its highest level since March.
Then on Wednesday, bonds were further sold off after a Bloomberg report (https://www.bloomberg.com/news/articles/2018-01-10/china-officials-are-said-to-view-treasuries-as-less-attractive) that China is considering halting or cutting its purchases of U.S. government paper. Sources told the news outlet that China found that U.S. bonds were becoming less attractive and that trade tensions with the U.S. could provide a reason to stop buying American government paper.
Yields started to fall in the afternoon after a strong 10-year debt auction. Traders said the selloff had made debt prices more appetizing. Bond auctions can influence the tone of the overall bond market, driving affecting yields of outstanding paper.
What are strategists saying?
"If the reports turn out to be true and China no longer sees Treasurys as an attractive option, the repercussions could be significant as the country is one of the biggest holders of U.S. debt. A significant change in policy could put considerable upside pressure on U.S. yields, the result of which would be an effective tightening for the U.S.," said Craig Erlam, senior market analyst at Oanda, in a note.
"The last two days we have seen a pretty steep selloff, largely coming around from newsflow of the wind down of QE by the Bank of Japan, and we saw that in their balance sheet data," said Bill Northey, chief investment officer, U.S. Bank Private Client Group.
"It's important to note that market expectations of inflations, or breakevens on TIPs (Treasury inflation-protected securities) have moved to 2%. That is certainly meaningful in the context that its in line with what the Fed's expectations of what inflation is going to be. Seeing the opportunities for inflation being viewed higher, buyers of U.S. Treasurys at the margin have stepped back and conspired to see a selloff in the 10-year Treasury," said Northey.
What else are on investors' radar?
What are other assets doing?
The moves in the bond market sent ripples through financial markets as well. U.S. stocks sold off , with all three major equity indexes retreating from records. The Nasdaq Composite slipped around 0.4%.
The yen jumped, with the dollar falling to Yen111.41 from Yen112.65 late Tuesday in New York. The Japanese 10-year bond yield rose 2 basis points to 0.085%, their highest levels since July, according to Tradeweb.