China's Treasuries Holdings Rise to One-Year High as Japan Adds

China, the largest foreign lender to the U.S. government, boosted its Treasuries holdings in November to the most in one year, while No. 2 Japan added securities for an eighth-consecutive month.

China’s position in the debt increased $200 million, or 0.02 percent, to $1.17 trillion, U.S. Treasury Department data released yesterday show. Japan’s holdings rose $900 million, or 0.08 percent, to a record $1.13 trillion. For the year, Japan has purchased $74.4 billion of the securities, more than any other country, compared with $18.2 billion for China.

Demand for the debt cooled amid a shift in the market’s focus from the U.S. election in November, won by President Barack Obama, to the debate over the scheduled expiration of the George W. Bush-era tax cuts that were extended in 2010 as part of a fiscal-stimulus package.

“The Chinese, while arguably less active buyers than they had been, certainly have structural demand for Treasuries in defense of their own currency,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “As long as there are net-positive flows into China and the yuan, those flows will produce dollars to be invested.”

Japan’s holdings are likely to grow “given the fact that they’re openly planning a foreign-exchange-stabilization fund,” Lyngen said.

The benchmark 10-year Treasury yield fell 0.2 basis points or 0.02 percentage point, to 1.82 percent yesterday in New York, according to Bloomberg Bond Trader prices.

China’s Dilemma

China has “a very large portfolio of Treasuries and they don’t need to constantly add to it,” said Thomas Simons, a government-debt economist in New York at Jefferies & Co., one of 21 primary dealers that trade with the Federal Reserve. “They’ve publicly announced they have an aim to diversify their currency exposure. In light of that, it makes sense they’d keep things close to status quo.”

Lou Jiwei, head of China Investment Corp., said Jan. 14 at a Hong Kong forum that while U.S. Treasuries are “still a safe asset at the moment,” with an economic recovery, “it’s only a matter of time that U.S. interest rates will rise and those bonds will depreciate in value.”

China’s dilemma is that eschewing the debt “reduces our portfolio’s ability to hedge against risks,” Jiwei said. “If we buy it, over the long term, it’s not a good asset. So our approach is limited buying.”

The 10-year yield will rise to 2.2 percent by year-end, according to the median forecast in a Bloomberg News survey of 76 economists.

Japan Interventions

Newly elected Japanese Prime Minister Shinzo Abe has campaigned to spur growth and seek a more aggressive central bank has driven down the yen, which would leave the Bank of Japan to investor proceeds in foreign-currency denominated assets. China had added U.S. government securities as part of a strategy to support rapid economic growth, buying the debt to limit gains in its currency to maintain the pace of its exports.

Japan’s biggest Treasury purchases in the past followed interventions the currency market. Japan bought $76.9 billion of the securities in September 2011 and $59.9 billion of U.S. government debt in November 2011 after selling 13.59 trillion yen ($153 billion) in interventions in September and October of that year.

While China holds $37.8 billion more Treasuries than Japan, that gap has narrowed from $429.7 billion in July 2011, Treasury data show. At the 2012 pace of buying, Japan may overtake China as the largest holder of U.S. government debt in July.

Foreign Holdings

Holdings of Treasuries outside the U.S. rose in November by $31 billion, or 0.56 percent, the 11th consecutive increase since December 2011 when foreign ownership declined, the data show. Foreign investors have boosted their holdings 9.6 percent through October after climbing 12.8 percent in 2011.

The U.S. marketable borrowing reached $11.1 trillion in November, and was up 11 percent for all of 2012, Treasury data show.

Foreign investors owned 50.4 percent of the marketable debt, the least since May, the data, known as Treasury International Capital, show. China held 10.6 percent of the U.S. debt, its smallest share since March 2008. Japan’s stake comprised 10.3 percent of U.S. government obligations, the least since October 2011.

Of the $5.56 trillion Treasuries held outside of the U.S., 72 percent, or $3.96 trillion, are owned by official institutions including central banks, finance ministries and other fiscal agents, Treasury data show.

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