China, the largest foreign lender to the U.S., boosted its longer-term Treasury holdings in September by the most since March 2010 as Europe’s sovereign-debt crisis helped fuel a push for safer assets.
China bought $20.7 billion of U.S. government notes and bonds, raising its total long-term holdings to $1.14 trillion, according to Treasury data released yesterday. The nation’s amount of bills fell 68 percent to $4.4 billion. Overall, China’s position in Treasuries climbed 1 percent to $1.15 trillion, the largest monthly increase since October 2010.
The increase, which followed a reduction in China’s position in August that was the most on record, came as European leaders struggled to contain turmoil spreading from Greece to Italy and Spain, and as the Federal Reserve agreed on a plan to cut borrowing costs by lengthening the maturity of its bond portfolio.
The buying “was reactive,” said George Goncalves, head of interest-rate strategy in New York at Nomura Holdings Inc., one of the 21 primary dealers that trade directly with the Fed. “People were pretty scared. During the flight to quality, I’m sure that China was involved.”
Overall, foreign holdings of Treasuries rose 1.9 percent in September to a record $4.66 trillion, U.S. government data show. Foreigners held 48.4 percent of the $9.62 trillion of outstanding public Treasury debt, the most since May.
The president of China’s sovereign-wealth fund said this week that it was difficult to dump investments in other countries’ debt, as doing so would result in a "rapid devaluation of the assets in our hands."
“When we talk about international investments, we must consider whether they serve our interests,” Gao Xiqing, president of China Investment Corp., said at a forum in Hong Kong on Nov. 15. “We can’t say that we’re a generous nation and we can help you at whatever economic costs to us.”
The surge in demand from China indicates it will continue to support the Treasury market as the U.S. faces uncertain economic growth after recording its third consecutive year with a budget deficit surpassing $1 trillion, Goncalves said.
China struck back yesterday in a continuing debate with the U.S. over the valuation of its currency. Criticism of China’s exchange rate is “groundless and unreasonable” and the value of the yuan isn’t the cause of lopsided trade flows, Commerce Ministry Spokesman Shen Danyang said in Beijing.
The comments were in response to President Barack Obama’s criticism of China’s currency policy at a summit of leaders of Asia-Pacific economies on Nov. 13, saying “enough’s enough” on what the U.S. views as an inadequate appreciation of the yuan.
China’s Treasury purchases have had the effect of limiting gains in the yuan against the dollar.
Treasuries gained 1.6 percent in September, according to Bank of America Merrill Lynch bond indexes, compared with a 7.2 percent decline in the Standard & Poor’s 500 stock index, an 11.4 percent drop in gold and a 0.9 percent loss for company bonds. The 10-year Treasury bonds gained for a fourth day, sending yields down two basis points to 1.98 percent as of 10:45 a.m. in Tokyo today.
September’s Treasury gains followed increases in July and August that produced a 6.4 percent return in the period from July to September, the biggest quarterly increase including reinvested interest since the last three months of 2008, the Bank of America Corp. indexes show. Company bonds returned 2.26 percent and mortgage securities gained 2.32 percent during the quarter, the indexes showed.
The Standard & Poor’s 500 Index declined 14 percent in the quarter and gold appreciated 7.8 percent. The dollar rose 5.7 percent against a basket of currencies including the euro and the yen, according to IntercontinentalExchange Inc.’s Dollar Index.
“Towards the end of August is when Europe really started to melt down,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, a primary dealer. “There were going to be some downgrades to growth expectations on a global basis.”
Concerns about sovereign debt in Europe expanded into the region’s banking sector, prompting a move to safe havens.
“People were looking at delevering,” Caron said. “What are you going to do with the cash as you do that? You’re going to buy cash-like products, like Treasuries.”
Cash on Hand
Japan, the second-largest foreign holder of the debt, increased its position 2.2 percent to $956.8 billion after raising its stake 2.4 percent in August, Treasury data show. The data also showed that holdings of Treasuries increased in the U.K. and Caribbean, where other nations often conduct purchases.
Foreign holdings of U.S. Treasuries have risen 5.1 percent this year through September, 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.
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.