Wall Street's major indexes pared earlier losses on Wednesday as higher US government bond yields drove gains for banks and other financial stocks. The market for US government bonds is becoming less attractive relative to other assets, and trade tensions with the USA may provide a reason to slow or stop buying American debt, the thinking of these officials goes, according to the people, who asked not to be named as they aren't allowed to discuss the matter publicly.
"The latest rise (in yields) is caused by the news that Chinese officials are recommending lower purchases of U.S. Treasuries for their FX reserves", said Mizuho strategist Antoine Bouvet, referring to a Bloomberg report.
Investors monitor stock prices in a brokerage house in Beijing on January 2, 2018. "A significant change in policy could put considerable upside pressure on US yields". The Fed is also expected to raise rates three times this year.
China is the largest foreign holder of USA government debt, with $1.19 trillion in Treasuries as of October 2017, data from the Treasury Department show. Japan was second with USA bond holdings worth $1.09 trillion.
Any reduction in Chinese purchases would come just as the USA prepares to boost its supply of debt.
USA stocks have had a strong start to the year, with the S&P and the Nasdaq having closed at record highs on every single day in 2018, buoyed by optimism over global economic growth and expectations of a strong quarterly earnings.
Fewer Chinese purchases of US bonds would likely see interest rates paid to attract buyers climb higher, and thus the US Federal Reserve would have less need to hike rights.
But Erlam says it is too "early to speculate" on the likelihood that China will "suddenly" reduce its holdings.
Why does China own $1.2 trillion of Treasuries in the first place?
China's State Administration of Foreign Exchange did not immediately respond to a faxed request for comment on the Bloomberg report. Yields on 10-year Treasuries rose for a fifth day, touching the highest since March.
Stocks also dipped, with the Dow Jones industrial average tumbling almost 129 points before cutting those losses sharply to around a 25-point deficit around 11:45 a.m. EST.
On Tuesday, Bill Gross, the high-profile fixed-income investor, tweeted: "Bond bear market confirmed today". The strategies discussed in the review don't concern daily purchases and sales, said the people.
And China could get even tougher.
The key question is whether it is in China's best interest to sell U.S. Treasuries as an opening salvo in what could become a trade war, analysts say.
A top Treasury official signaled confidence in the USA government debt market, which at US$14.5 trillion is the world's largest.