China Reduced Treasury Holdings for Second Straight Month as Yields Fell

China, the largest foreign lender to the U.S., reduced its holdings of Treasuries in November for a second month as yields on the debt approached lows of the year and total foreign demand accelerated.

China’s U.S. government securities ownership shrank by 0.1 percent, or $1.5 billion, in November to $1.13 trillion, according to Treasury data released yesterday. The Communist nation’s bill holdings fell 12 percent to $2.3 billion.

Holdings of Treasuries by U.K. buyers, who are often seen as a proxy for Chinese investors operating away from the mainland, rose to a record after declining in October for the first time since June 2010. The Treasury’s initial reports on international purchases are based on the location where the transaction occurs. Revisions are based on location of the beneficial owner.

“The monthly TIC data flows likely mask net purchases” by Chinese investors, said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, one of 21 primary dealers that trade with the Federal Reserve. “The bottom line is they have dollars to invest.”

Holdings in the U.K. jumped 4.4 percent to $429.4 billion, Treasury data show. Investors in the U.K. have increased their holdings 59 percent this year.

Japan boosted its holdings by $59.9 billion to a record $1.04 trillion as finance officials sold yen to arrest the appreciation of the currency and bought dollars.

Foreign Ownership Rises

Total foreign holdings rose 1.7 percent in November to $4.75 trillion, U.S. government data show. Foreigners held 48 percent of the $9.88 trillion of outstanding public Treasury debt, up from 47.8 percent the month before.

Foreign holdings of U.S. Treasuries have risen 7.1 percent this year through November, the smallest increase since 2006. International ownership of U.S. government debt rose 20 percent annually in the prior two years, and at a compound rate of 17 percent since 2001, or as far back as the data are available.

Treasuries returned 0.73 percent in November after losing 0.76 percent in October, according to the Bank of America Merrill Lynch Treasury Master Index. Yields on benchmark 10- year notes were 1.9 percent, down from 2.07 percent on Nov. 30.

Holdings Revisions

China’s holdings of U.S. debt have fallen 2.4 percent this year through November to $1.13 trillion, the least since July 2010, when they totaled $1.12 trillion, from $1.16 trillion at the end of 2010, Treasury data show.

The data are expected to be revised in 2012. On Feb. 28, 2011, the U.S. updated earlier estimates, showing China’s Treasury investments in October 2010 were a record $1.18 trillion, 30 percent more than the initial estimate of $906.8 billion.

When the data is revised in February “all of a sudden you see this big revision and China shows up with all these purchases nobody knew about,” said Scott Sherman, an interest- rate strategist at primary dealer Credit Suisse Group AG in New York. “Similarly the U.K. purchases that tend to be pretty steady and strong get knocked back down.”

A decline in China’s currency reserves may be a sign that China’s economy isn’t going to be as reliant on buying U.S. debt to make its exports more attractive, said Michael Cheah, who oversees $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey.

China’s reserves totaled $3.18 trillion as of Jan. 13, or 2.5 percent below the Aug. 31 high of $3.26 trillion, according to China’s National Bureau of Statistics.

Currency Controls

China’s currency, the yuan, rose 5 percent against the dollar last year, the biggest yearly increase since a 7 percent gain in 2008.

The growth in China’s Treasury holdings has historically been the result of efforts “to prevent the renminbi from strengthening, that is, to protect the exporters,” Cheah said. “The drop in Treasury holdings reflects a drop in China’s total reserves. They’re not intervening as aggressively as before.”

China’s economy expanded at the slowest pace in 10 quarters as Europe’s debt crisis curbed export demand and the property market weakened. Gross domestic product rose 8.9 percent in the fourth quarter from a year earlier, the statistics bureau said in Beijing Jan. 17.

China is prepared for a slowdown in economic growth and a mild moderation is “desirable,” Ma Jiantang, head of the statistics bureau, said at a briefing Jan. 17. The government has set a target of 7 percent annual expansion for the current five-year plan that runs through 2015 and will focus more on the quality of growth, he said.

‘Manage Their Absence’

A slackening of demand from China doesn’t now pose a threat to the U.S. in the form of higher rates, as the domestic demand based has broadened, said Cheah, who worked at the Singapore Monetary Authority from 1982 through 1999, and now teaches finance classes at New York University and at Chinese universities. “We are able to manage their absence with bigger than otherwise domestic demand that helps underpin our economy.”

The Fed holds $2.67 trillion of Treasuries in custodial accounts, the fewest since April 20. They have declined 3.2 percent since Aug. 24 when they reached a high of $2.76 trillion.

“If you look at the Fed’s custody holdings, you do see weakness,” Credit Suisse’s Sherman said. At the same time, he said the European debt crisis has also helped support prices for Treasuries by broadening demand among international investors.

“There are a lot of private investors who are buying Treasuries because Europe is not a safe asset anymore,” Sherman said. “The population of risk-free assets is smaller and that’s making Treasuries in higher demand.”

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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