China’s U.S. Mortgage Buying May Be Bet on QE3, Nomura Says
Chinese investors added U.S. government-backed mortgage securities and so-called agency debentures in December, signaling the country may be anticipating further purchases of housing debt by the Federal Reserve, according to Nomura Securities International analysts.
The $9.5 billion rise reported today in China’s holdings in the debt came as the nation dumped $33 billion of long-term Treasuries, according to New York-based analysts at the Japanese bank. The category includes home-loan bonds guaranteed by Ginnie Mae and the Federal Home Loan Bank system’s unsecured notes.
Fed officials including Chairman Ben S. Bernanke have been saying the central bank may undertake additional bond buying, focusing on mortgage debt, to stimulate the economy in a process known as quantitative easing, or QE. Officials from China to South Korea were among critics of the last round, announced in November 2010 and called QE2, as Asian countries were raising interest rates in part to stem property and stock surges.
“The Chinese have always viewed QE2 as an aggressive act by the Fed,” George Goncalves, head of rates research at Nomura, wrote today in a note to clients. “Seems like this time around they are positioning to profit from QE3 when it comes.”
Another round of asset purchases by the Fed would make mortgage debt less available in the secondary market and probably drive up prices.
China owns about 40 percent of U.S.-backed mortgage bonds held overseas, according to a separate note today by Nomura analysts led by Ohmsatya Ravi. The Treasury Department released monthly data today on changes in international holdings of U.S. assets.
The Treasury data for individual countries fails to differentiate between mortgage bonds and the corporate debt of U.S. agencies and government-tied issuers. It also doesn’t reflect changes in holdings stemming from repayments on the underlying home loans.
China’s holdings of agency mortgage bonds and debentures fell in four of the eight months from April through November, with increases of less than $2.1 billion in three of the periods and $3.3 billion in September, according to Treasury data.
Total international investment in the $5.4 trillion market for mortgage securities guaranteed by U.S.-owned Ginnie Mae or government-supported Fannie Mae and Freddie Mac rose by $4.6 billion in December, following declines in October and November that totaled $23.6 billion, according to Nomura. Those figures include adjustments for prepayments.
Discussing the “underperforming economy,” Bernanke said at a Jan. 25 press conference that more bond buying by his central bank is “an option that is certainly on the table.” The Fed chairman underscored his desire to bolster housing last month by sending Congress a paper on policy options prepared by his staff.
As the Fed announced QE2 in November 2010, China’s Vice Foreign Minister Cui Tiankai said the U.S. “owes us some explanation on their decision,” and Chinese central bank adviser Xia Bin called it “uncontrolled” money printing. Under that program, the U.S. central bank bought $600 billion of Treasuries.
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