China Treasury Holdings Drop to 6-Mo. Low as Yields Rise

China, the largest foreign lender to the U.S., reduced its holdings of Treasuries as yields on the debt rose for a fourth month amid speculation the Federal Reserve would reduce the pace of its bond purchases.

China’s holdings fell by $11.2 billion, or 0.9 percent, in August to $1.268 trillion, the fewest since February. The Chinese position has dropped by $29.2 billion since peaking this year at $1.297 trillion in May. Treasury 10-year note yields ended August at 2.78 percent, the highest monthly close since July 2011, rising 1.11 percentage points after the end of April. It was at 2.51 percent yesterday in New York.

Foreign holdings of Treasuries declined for a fifth month for the first time since 2001 as the proportion of U.S. government debt held abroad dropped to 48.2 percent from 50.4 percent at the end of last year, the smallest share since November 2006. Overseas holdings have fallen by $133 billion during that period.

“Central banks are like any other investor -- they’re charged with preserving the value of the assets they hold,” said Aaron Kohli, an interest-rate strategist BNP Paribas in New York, one of 21 primary dealers that trade with the Fed. While China’s holdings have decreased “it’s not a wholesale dumping,” Kohli said. “It’s a reduction because that asset seems like it would underperform.”

Yearly Gain

For August, foreign holdings of Treasuries declined by $5.1 billion, or 0.1 percent, to $5.59 trillion, U.S. government data show. That trimmed the increase in holdings by overseas investors to 0.3 percent this year, putting them on a pace for the smallest annual gain at least since Bloomberg began compiling full-year data in 2001.

Since May, when Fed officials began to discuss the possibility that the central bank would cut the size of its $85 billion a month in bond purchases, U.S. borrowing costs have climbed faster than the rest of the world.

Yields on Treasuries now average 1.40 percent, 0.16 percentage point less than non-U.S. government debt, according to index data compiled by Bank of America Merrill Lynch Indexes. That compares with a 0.41 percentage point gap on May 21. During the past five years, investors have demanded 0.36 percentage point more to own government notes outside the U.S. instead of Treasuries.

Japanese holdings of Treasuries rose $13.7 billion, or 1.2 percent, to a record $1.149 trillion. Since falling to a 15-month low in June, Japan has added $65.7 billion of U.S. government securities, a 6.1 percent increase, the largest two-month jump since an $82.5 billion gain for October-November 2011 following Japanese currency interventions earlier that year. Japan is the second largest foreign holder of Treasuries.

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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