Fixed-income investors remain transfixed on Treasury yields, trying to second guess when the Federal Reserve might look to rein in its bond-buying program. But strategists have told CNBC there may be another threat on the horizon with China starting to fall out of love with U.S. debt.
Yi Gang, a deputy governor at the People's Bank of China (PBoC), said in a speech at Tsinghua University on Wednesday that it's no longer in China's favor to accumulate foreign-exchange reserves, according to reports by both Bloomberg and the Wall Street Journal.
"The appreciation of the yuan since 2005 has been primarily driven by market forces and overall this has helped improve the welfare of the Chinese people," he said, but gave no time frame for the change in strategy.
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Analysts see this as the PBoC hinting that it will let its currency fluctuate, without intervention, thus negating the need for holding large reserves of the dollar. And if the dollar is no longer needed, then it could look to curb its purchases of dollar-denominated assets like U.S. Treasurys.
"If they are looking to reduce these purchases going forward then, yes, you'd have to look at who the marginal buyer would be," Richard McGuire, a senior rate strategist at Rabobank told CNBC in an interview.
"Together, with the Federal Reserve tapering its bond purchases, it has the potential to add to the bearish long-term outlook on U.S. Treasurys."
China is by far the largest foreign creditor to the U.S., holding just under $1.3 trillion in U.S Treasurys, according to Reuters, and a total of $3.66 trillion held in foreign exchange reserves.
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Twenty years ago China would have kept nearly all its reserves in mostly short-dated government bonds, according to Kit Juckes, global head of foreign exchange strategy at Societe Generale. Despite recent diversification, the Chinese still hold a large slice, he added, and has probably kept U.S. Treasury yields lower by 40 basis points in recent years.