Despite gloomy predictions and concerns over spiking bond yields, analysts have struck a fairly sanguine tone over China's acceleration in the selling of its dollar-denominated debt reserves.
China is the world's largest holder of U.S. debt, but Societe Generale analysts estimate that the People's Bank of China (PBoC) has sold at least $106 billion of reserve assets since its currency devaluation this month. A Bloomberg report on Thursday, citing people familiar with the matter, confirmed that China had cut its holdings of Treasurys to raise the U.S. dollars needed to support the yuan.
Logically, this would be seen as bearish for U.S. bond prices - which have an inverse relationship with yields – but the rates strategy team at Rabobank believe the impact is less than clear cut.
"The obvious conclusion here is that PBoC (People's Bank of China) selling is bearish. However, this could be wrong in precisely the same way investors tend to mistakenly believe QE (quantitative easing) purchases are bullish," the bank said in a note on Friday morning.