China’s Treasury Holdings Fall Amid Fed Talk on Taper

Holdings of Treasuries in China, the largest foreign lender to the U.S., fell in June for the first time in five months amid discussion by Federal Reserve officials about slowing the pace their bond purchases.

China’s stake dropped by $21.5 billion in June, or 1.7 percent, to $1.276 trillion, according to Treasury Department data released yesterday. Yields climbed after June 19 when Fed Chairman Ben S. Bernanke said policy makers might reduce the size of their $85 billion a month in purchases of Treasuries and mortgage securities in coming months.

The pullback by China comes as overseas holdings of Treasuries have grown $26.8 billion, or 0.5 percent this year, the slowest pace since a 2.8 percent decline in the first six months of 2006. Treasuries have lost 3.1 percent this year, according to Bank of America Merrill Lynch indexes, headed for the worst performance since 2009.

“What you saw was a knee-jerk reaction” from China, said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. The drop wasn’t “any kind of a message as to a concerted effort to wind down excess exposure because of some duration risk given the Fed’s tapering goals,” he said.

Treasury Selloff

China’s holdings in May were $1.297 trillion, less than the $1.316 trillion reported by the Treasury last month. The Treasury revises the data on a monthly basis based on the nationality of the beneficial holder of the debt, while the initial figure is derived from the location of the purchase.

The benchmark 10-year Treasury yield rose 36 basis points or 0.36 percentage point, to 2.49 percent in June. It touched 2.82 percent yesterday, the highest since Aug. 1, 2011.

The decline in China’s stake “does help explain why the Treasury market sold off in June,” said Michael Pond, head of global inflation-linked research at Barclays Plc, one of 21 primary dealers that trade with the Fed.

Currency reserves have risen 5.6 percent through June to $3.5 trillion, according to data from the People’s Bank of China. Reserve growth in 2012 was 4.1 percent, the slowest pace since 1998, the data show. Reserves had grown at a double-digit pace for 11 consecutive years.

China’s Treasury position has risen $55.4 billion or 4.5 percent so far this year after a 5.9 percent increase in 2012. The holdings declined 0.7 percent to $1.152 trillion in 2011, the first annual decline on record going back to 2001.

Investors in China held 11.1 percent of the $11.4 trillion of marketable U.S. debt in June compared with a record 14 percent in June 2009.

All foreign investors owned 49.1 percent of the marketable debt, the least since May 2011, the data, known as Treasury International Capital, show.

Demand for the debt from overseas investors fell by $56.5 billion, or 1 percent in June to $5.6 trillion. It was the first three-month decline in overseas holdings since 2001.

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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