With China unexpectedly announcing the revaluation of the yuan (RMB) last Thursday, MBS analysts expect the People's Bank of China to buy fewer U.S. dollar fixed-income assets, including mortgage-backed securities. The lower demand should not be drastic, however, but a gradual dip in U.S. investments is expected over time.

Bear Stearns Senior Economist Conrad DeQuadros said that China's change in currency valuation does not imply an automatic reallocation of Chinese reserve assets away from the U.S. dollar. Over time, the market will likely push the RMB to a higher level against the dollar but the Chinese government is seen intervening to keep currency fluctuations range bound.

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