China’s Holdings of Treasuries Decline for First Time on Record

China Trims Holdings of Treasuries to Lowest Level
China is the largest foreign lender to the U.S. Photographer: Nelson Ching/Bloomberg

China, the largest foreign U.S. creditor, reduced its holdings of U.S. government securities last year for the first time since the Treasury Department began compiling the data in 2001.

The world’s second-largest economy held $1.15 trillion Treasuries as of Dec. 31, down from $1.16 trillion at the end of 2010, according to Treasury data released yesterday. The U.S. revised the figures to show that China held about $51 billion more than reported earlier last month. The revision shows nation’s holdings peaked at $1.3149 trillion in July.

China’s policy makers have advocated diversification of the nation’s foreign-exchange reserves away from U.S. assets after more than doubling its holdings of Treasuries since 2007 in the wake of the global financial crisis. Yields on benchmark 10-year Treasury notes dropped to a record low of 1.67 percent in September as investors sought a haven from Europe’s sovereign-debt crisis and the Federal Reserve pledged to keep borrowing costs close to zero to sustain economic growth.

“What we may be seeing from China is similar behavior to many domestic investors,” said William O’Donnell, head U.S. government bond strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut, one of 21 primary dealers that trade with the Fed. “With 10-year notes sub 2 percent they don’t have a lot of interest or appetite for Treasuries.”

The 10-year note yield rose one basis points, or 0.01 percentage point, to 1.98 percent at 11:04 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2 percent security due February 2022 fell 1/8, or $1.25 per $1,000 face amount, to 100 1/8.

European Purchases

Japan maintained its place as America’s second-largest lender, with $1.06 trillion of Treasuries in December, while Brazil held $226.9 billion, the Treasury Department said. Hong Kong held $121.7 billion at the end of last year, according to the data. Total foreign holdings amounted to $5 trillion, up from $4.44 trillion in December 2010.

As China’s demand for Treasuries has waned, buyers in Europe have taken up the slack as the region’s debt crisis worsened. Luxembourg increased its holdings by 74 percent to $150.6 billion last year, Switzerland boosted its stake 33 percent to $142.5 billion and Belgium’s position in the debt more-than-quadrupled to $135.2 billion.

The Treasury data is inconsistent month-to-month as a new methodology has been phased in from a mainly transaction-based survey to a custodian survey.

As of January 2012, the new data on foreign holdings of Treasury securities is being collected monthly instead of quarterly.

Largest Owner

The Fed remains the top holder of U.S. debt with $1.66 trillion on its balance sheet. The central bank said in September it would sell $400 billion of short-term debt in its holdings and buy an equal amount of longer-maturity Treasuries. Traders call the program Operation Twist after a similar effort in 1961 to contain borrowing costs for companies and consumers.

“It makes sense that China would sell into the Fed’s twist, but while they are cutting their holdings they are still far and away one of the largest holders of U.S. debt, and that isn’t changing anytime soon,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., another primary. “While there has been speculation that there would be potential alternative for Treasuries as a reserve asset, we’ve seen over the last year that that just isn’t true, and the U.S. is where it’s at.”

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