Yuan Strength Will Fail to Sink Treasuries, Bank of Tokyo Says
By Joji Mochida
April 27 (Bloomberg) -- Treasuries will remain supported even if China allows the yuan to strengthen as U.S. debt remains attractive due to its yields and a lack of alternative investments, said Bank of Tokyo-Mitsubishi UFJ Ltd.
U.S. government debt may initially decline on yuan gains as China will accumulate fewer dollar reserves by selling its currency, said Minori Uchida, a senior analyst at the unit of Japan’s largest banking group in Tokyo. Treasuries would then rebound as rising yields lured investors, he said.
“Investors may soon buy back Treasuries after a temporary drop,” Uchida said in an interview with Bloomberg on April 23. Buyers will return as “no other assets have a triple A rating and high liquidity like U.S. Treasuries.”
Treasuries remain the investment of choice for debt buyers as concern about Greece’s budget deficit damps the attraction of alternatives such as European bonds, he said.
At a time when concern is rising about sovereign debt, including some euro-area bonds and U.K. gilts, “would China shift from Treasuries to other sovereigns as if to willingly invite trouble?” he said.
China remained the biggest foreign holder of U.S. government debt in February with $877.5 billion, followed by Japan with $768.5 billion, according to figures released by the Treasury Department. Still, China has reduced its holdings from a record 939.9 billion in July 2009.
Decade-Long Peg
Treasuries dropped in July 1995, sending yields up 36 basis points, when China ended the yuan’s decade-long peg to the dollar, and said it would allow the currency to fluctuate against a basket of counterparts.
Even if China incurs a foreign-exchange loss on its Treasury holdings due to a stronger yuan, it would be able to offset the loss with higher interest payments, Uchida said.
The average coupon for two-, five- and 10-year Treasuries in the past 10 years is nearly 4 percent, Uchida said. China will likely limit the yuan’s annual gain against the dollar to about 3 percent, less than average Treasury yields, he said.
Twelve-month non-deliverable yuan forwards were 6.6074 per dollar as of 10:51 a.m. in Tokyo, according to data compiled by Bloomberg. The contracts show traders expect the currency will strengthen 3.3 percent from the current spot rate of 6.8269.
By Joji Mochida
April 27 (Bloomberg) -- Treasuries will remain supported even if China allows the yuan to strengthen as U.S. debt remains attractive due to its yields and a lack of alternative investments, said Bank of Tokyo-Mitsubishi UFJ Ltd.
U.S. government debt may initially decline on yuan gains as China will accumulate fewer dollar reserves by selling its currency, said Minori Uchida, a senior analyst at the unit of Japan’s largest banking group in Tokyo. Treasuries would then rebound as rising yields lured investors, he said.
“Investors may soon buy back Treasuries after a temporary drop,” Uchida said in an interview with Bloomberg on April 23. Buyers will return as “no other assets have a triple A rating and high liquidity like U.S. Treasuries.”
Treasuries remain the investment of choice for debt buyers as concern about Greece’s budget deficit damps the attraction of alternatives such as European bonds, he said.
At a time when concern is rising about sovereign debt, including some euro-area bonds and U.K. gilts, “would China shift from Treasuries to other sovereigns as if to willingly invite trouble?” he said.
China remained the biggest foreign holder of U.S. government debt in February with $877.5 billion, followed by Japan with $768.5 billion, according to figures released by the Treasury Department. Still, China has reduced its holdings from a record 939.9 billion in July 2009.
Decade-Long Peg
Treasuries dropped in July 1995, sending yields up 36 basis points, when China ended the yuan’s decade-long peg to the dollar, and said it would allow the currency to fluctuate against a basket of counterparts.
Even if China incurs a foreign-exchange loss on its Treasury holdings due to a stronger yuan, it would be able to offset the loss with higher interest payments, Uchida said.
The average coupon for two-, five- and 10-year Treasuries in the past 10 years is nearly 4 percent, Uchida said. China will likely limit the yuan’s annual gain against the dollar to about 3 percent, less than average Treasury yields, he said.
Twelve-month non-deliverable yuan forwards were 6.6074 per dollar as of 10:51 a.m. in Tokyo, according to data compiled by Bloomberg. The contracts show traders expect the currency will strengthen 3.3 percent from the current spot rate of 6.8269.