Treasuries’ Foreign Buying Doubles China’s Sales

Even with all the concern about the so-called fiscal cliff, another confrontation over government borrowing limits and Chinese ownership of U.S. debt, foreign investors can’t get enough Treasuries.

Brazil, Belgium, Luxembourg, Russia, Switzerland, Taiwan and Hong Kong boosted their holdings of U.S. government securities by a collective $264.8 billion since the last debt ceiling debate ended in August 2011, Treasury data released Nov. 16 show. The purchases more than made up for the $123 billion decline in Treasuries owned by China, America’s biggest overseas creditor, to $1.156 trillion.

The rise in international ownership shows growing confidence in the U.S. while China’s reduced stake undermines Republican assertions that the nation has gained too much influence. President Barack Obama and Congressional leaders agreed Nov. 16 to begin talks on a long-term fiscal plan to avert more than $600 billion in mandated spending cuts and tax increases scheduled to big Jan. 1 that threaten the recovery.

“Despite our fiscal situation, despite all these issues, there hasn’t been much of a buyers’ strike from the Treasury’s perspective,” Aaron Kohli, an interest-rate strategist at BNP Paribas in New York, one of 21 primary dealers that trade with the Federal Reserve, said in a Nov. 13 telephone interview. “One has been replaced by the other and that really does demonstrate the depth of demand.”

Bond Yields

BNP forecasts the 10-year yield will rise to 2 percent by June 2013, keeping it below the average of about 5 percent since 1990. The benchmark 10-year note’s yield fell 2.5 basis points last week, or 0.025 percentage point, to 1.58 percent, according to Bloomberg Bond Trader prices. The rate was 1.62 percent at 11:04 a.m. in New York.

Democratic Senate Majority Leader Harry Reid and Republican Speaker of the House John Boehner said the first meeting between the parties and Obama suggested progress was possible.

Treasuries have returned 2.8 percent this year and 1 percent since the election Nov. 6, according to Bank of America Merrill Lynch bond indexes. After Obama’s re-election, the Standard & Poor’s 500 Stock Index has declined 4.6 percent, while the U.S. Dollar Index (DXY), which measures the currency against six of America’s major trading partners, has risen 0.6 percent.

Chinese ownership of U.S. debt was an issue during the election battle.

China Threat

“Does the America we want borrow a trillion dollars from China? No,” Republican candidate Mitt Romney said Aug. 30 in accepting the Republican presidential nomination at the party’s convention in Tampa, Florida.

A super-political action committee, the Americans for Prosperity Foundation, joined with the advocacy group Citizens Against Government Waste to air television advertisements that showed China’s ownership of Treasuries as a threat to U.S. independence.

“America tried to spend and tax itself out of a great recession” and saddled itself with “crushing debt,” a Chinese professor in the future tells his students as English subtitles appear on the screen. “Of course we owned most of their debt, so now they work for us.”

David Koch, who with his brother Charles Koch controls Wichita-based Koch Industries Inc., is chairman of the Americans for Prosperity Foundation. The billionaires fund groups that advocate policies favored by the Republican party.

Message Purpose

“The message is not to be scared of what could happen with China, the message is to look at our policies domestically and look at the decisions we’re making and ask ourselves whether this is a path we want to continue to go down,” Levi Russell, a spokesman for the Americans for Prosperity Foundation said in a Nov. 16 telephone interview.

Japan, which raised its stake by 6.9 percent this year to $1.13 trillion, is on a pace to surpass China and top the list of foreign creditors by January.

The drop in holdings by China, whose economy is the world’s second-biggest, reflects a shifting emphasis from growth driven by exports fueled by a cheap currency, toward more internal consumption, according to Win Thin, the global head of emerging- market strategy at Brown Brothers Harriman & Co. in New York

‘Geopolitical Superpower’

China’s currency, the yuan, has appreciated 1.9 percent in the past year and reached 6.2252 per dollar on Nov. 14, the strongest level since the government unified the official and market exchange rates at the end of 1993. “It’s part of the rebalancing of the economy,” Thin said in a Nov. 16 telephone interview.

The combined holdings of Brazil, Switzerland, Belgium, Russia, Taiwan and Hong Kong, which own more than $100 billion in U.S. securities each, have increased their positions by at least 14 percent since August 2011, Treasury data show. They collectively own $1.23 trillion, up 28 percent.

“There’s been a lot of shifts in who’s doing what,” Carl Lantz, head of interest-rate strategy in New York at Credit Suisse Group AG, a primary dealer, said in a Nov. 9 telephone interview. “The overall picture is the U.S. remains the reserve currency, and that comes from the position as an economic and geopolitical superpower. By default there’s no better option.”

Stimulus Spending

The dollar’s share of global reserves jumped to 61.9 percent as of June 30 from 60.5 percent a year earlier, the Washington-based International Monetary Fund said Sept. 28. The euro’s share fell to 25.1 percent from 26.7 percent.

Credit Suisse raised its year-end forecast for the 10-year Treasury yield on Nov. 8 to 1.75 percent from 1.35 percent on expectations the U.S. will avoid the fiscal cliff.

Marketable debt in the U.S. has risen to $10.9 trillion from $4.4 trillion at the start of the financial crisis in July 2007 as policy makers borrowed to finance two rounds of stimulus spending and record budget deficits exceeding $1 trillion for four straight years in order to rescue the banking system and the automobile industry.

Total Treasury debt, which also counts securities that aren’t tradable, such as those held in the Social Security Trust Fund, was $16.26 trillion at the end of October, according to the government. The debt ceiling of $16.39 trillion may be reached about the end of December, the Treasury said in its Oct. 31 Quarterly Refunding Statement.

After losing 8.6 million jobs in 2008-2009, the U.S. economy has since added 4.4 million positions, with the unemployment rate declining to 7.9 percent in October from a high of 10 percent in October 2009. The Reuters/University of Michigan preliminary consumer sentiment index rose to 84.9 in November, the highest level since July 2007.

Relative Growth

Gross domestic product in the U.S. will increase 2.2 percent in 2012, followed by gains of 2 percent next year and 2.75 percent in 2014, according to the median estimate of almost 100 analysts in a Bloomberg News survey.

That’s better than the average of 1.28 percent this year for the Group-of-10 nations, followed by 1.3 percent growth in 2013 and 1.98 percent in 2014, separate surveys show.

The Fed and Chairman Ben S. Bernanke, after injecting $2.3 trillion into the financial system, said in September they would buy $40 billion a month in mortgage bonds until it sees “sustained improvement in the labor market.”

“We have a free and open economy and a Fed that’s not afraid to act,” said Scott Colyer, who manages $9.5 billion as chief investment officer at Advisors Asset Management in Monument, Colorado, in a Nov. 15 interview at Bloomberg headquarters in New York. “We have fixed, fundamentally, the problems.”

Colyer said he stopped buying Treasuries last year on the expectation that the next significant move in bond prices will be down as either the economy improves or the market perceives its debt burden as untenable.

Currency Reserves

The rise in foreign Treasury holdings comes as global currency reserves grew 7.8 percent to $10.79 trillion in the last year, Bloomberg data show. During that period, Brazil’s reserves increased 7.2 percent to $377.8 billion, Hong Kong’s expanded 7.1 percent to $301.7 billion and Taiwan’s rose 1.5 percent to $399.2 billion.

Brazil’s stake in U.S. government bonds has climbed 14 percent to $250.5 billion in the 13 months since Aug. 31, 2011, Hong Kong’s position has ballooned by 33 percent to $135.7 billion and Taiwan’s has soared by 40 percent to $200.4 billion.

Belgium’s has grown 54 percent to $133.7, Luxembourg’s has climbed 29 percent to $148.1 billion, and Russia’s has increased 18 percent to $162.8 billion during the same period.

The Swiss National Bank, which bought unprecedented amounts of foreign currencies to keep the franc from appreciating beyond 1.20 per euro since September 2011, raised its Treasury holdings by 24 percent to $195.8 billion in the 12 months ended Sept. 30. That represents almost half its reserves of 424.4 billion francs ($448 billion).

Storm Center

Switzerland is “surrounded by the heart of the storm” engulfing Europe, Jack McIntyre, a fund manager who oversees $33 billion in global debt at Brandywine Global Investment Management in Philadelphia, said in a Nov. 14 telephone interview. “They probably don’t mind having exposure away from Europe.”

McIntyre has reduced his Treasury holdings and is buying local-currency Brazilian debt and also “nibbling” at Italian and Portuguese government securities, he said.

Foreign investors held 50.7 percent of the outstanding public debt of the U.S. in September, the most in a year, according to Treasury data released Nov. 16. Of the Treasuries held outside of the U.S., 72.8 percent, or $3.97 trillion, are owned by official institutions including central banks, finance ministries and other fiscal agents, Treasury data show.

“As the global economy evolves you do get different players coming in,” Larry Dyer, a U.S. interest rate strategist with HSBC Holdings Plc in New York, a primary dealer, said in a Nov. 15 telephone interview. “As long as the river of dollars flowing out of the U.S. continues, odds are people are going to buy something with it, and the first stop of any accumulation that goes to a central bank is likely to be the Treasury market.”

Countries with more than $100 billion of Treasuries:

            %Increase  Holdings (Bln)  Purchases since Aug. 2011
Belgium        +54        $133.7              $46.6
Taiwan         +40         200.4               56.9
Hong Kong      +33         135.7               33.7
Luxembourg     +29         148.1               33.4
Switzerland    +24         195.8               38.2
Russia         +18         162.8               24.7
Brazil         +14         250.5               31.3
Total          +28       1,227.0              264.8


Countries with less than $100 billion of Treasuries:

            %Increase  Holdings (Bln)  Purchases since Aug. 2011
Norway        +163         $73.9              $45.8
Mexico         +90          56.7               26.8
Ireland        +79          92.2               40.8
Singapore      +51          91.9               30.9
India          +29          51.9               10.8
Thailand       +24          58.8               11.2
Canada         +22          57.0               10.4
Total          +58         482.4              176.7

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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