China, the largest-foreign lender to the U.S., reduced its holdings of Treasuries in August by the most in at least a decade as the stripping of America’s AAA credit rating by Standard & Poor’s sent yields to record lows.
The world’s second-largest economy cut its position in U.S. government securities by $36.5 billion, or 3.1 percent, to $1.14 trillion, according to Treasury Department data released yesterday in Washington. At the same time, the data showed total foreign ownership increased 2 percent to a record $4.57 trillion as global investors sought a refuge from the financial market turmoil that followed the downgrade.
Treasuries beat stocks and commodities in August as the combination of the downgrade to AA+, slowing U.S. growth and Europe’s debt crisis drove investors into the world’s biggest and most-liquid debt market. The Treasury data also showed that holdings of Treasuries increased in the U.K. and Caribbean, where other nations often conduct purchases through.
The move in China’s figure “is not a question of people disinvesting in the U.S. because there’s a negative macro outlook,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 22 primary dealers that trade Treasuries with the Federal Reserve. “This is a lot more technical in nature that has to do with dollar strengthening and opportunistic selling, given how low yields went.”
Treasuries returned 2.8 percent in August, while the global bond market gained 1.99 percent, according to Bank of America Merrill Lynch index data. The MSCI All-Country World Index of stocks fell 7 percent the same month, the biggest slump since May 2010, and the Standard & Poor’s GSCI Total Return Index of commodities lost 1.8 percent. Since August, the U.S. Treasury Master Index has gained 0.76 percent through Oct. 17.
‘The Safe Haven’
Foreign holdings of U.S. Treasuries have risen 3.1 percent this year through August, the smallest increase since 2006. International ownership of U.S. government debt rose 20 percent annually the prior two years, and at a compound rate of 17 percent since 2001, or as far back as the data is available.
“The safe haven quality of U.S. Treasuries was clearly not threatened as we got downgraded in early August,” Priya Misra, head of U.S. rates strategy in New York at primary dealer Bank of America Corp. said in a telephone interview yesterday. “If there were concerns AA+ was not safe enough, you don’t see it in the flows.”
The rise in U.K. holdings likely reflects acquisitions of Treasuries by investors making their purchases from that country, Misra said. U.K. holdings climbed 12 percent to $397.2 billion in August.
The Treasury’s initial reports on international purchases are based on the location where the transaction occurs, while revisions are based on location of the beneficial owner.
“China buying tends to happen through the U.K.,” Misra said. At the end of 2010 China’s holdings were revised up by more than $200 billion, while the U.K.’s were lowered by a similar amount, she said.
The data show Chinese investors’ position in U.S. notes and bonds fell to $1.12 trillion, the least since August 2010. China’s U.S. bills position rose 39 percent to $14 billion.