China’s Treasury Holdings Rise to 15-Month High as Japan Sells

China, the largest foreign lender to the U.S. government, boosted its holdings of Treasuries in February to the most in 15 months, while No. 2 Japan sold the debt for a fourth-consecutive month.

China’s position increased $8.7 billion, or 0.7 percent, to $1.223 trillion, U.S. Treasury Department data released yesterday show. Japan’s holdings dipped $6.8 billion, or 0.6 percent, to $1.097 trillion, the lowest since April 2012. Since reaching a peak of $1.132 trillion in October, Japan has shed $34.8 billion of the securities.

Demand for the debt from overseas investors cooled in February as U.S. economic data showed improvement and as speculation increased that Japan would expand its purchases of its own government debt. The U.S. created 268,000 jobs in February, Labor Department data released April 5 showed. The unresolved Italian elections held Feb. 24 fueled some month-end demand.

“February was a month more driven by the fundamentals,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., one of 21 primary dealers that trade with the Federal Reserve. “There was volatility toward the end when the Italian election didn’t go as planned.”

Traders anticipated that Japan, Asia’s second-biggest economy, will maintain easing measures that tend to spur declines in the currency. Japanese Prime Minister Shinzo Abe and his aides have said the yen is only correcting past gains and that their call for more aggressive monetary policy is centered on helping the economy.

Yields Decline

“China continues to buy and goes a little bit against the grain,” Goncalves said. “Japan at large was waiting for something from the policy side, setting themselves up locally, which required them to sell some Treasuries. It was more about a trade heading into the QE announcement.”

The benchmark 10-year Treasury yield fell 11 basis points or 0.11 percentage point, to 1.88 percent in February. It reached a high for the year of 2.08 percent March 8. The yield dropped four basis points to 1.68 percent yesterday in New York.

Abe, elected in December, campaigned to spur growth, with investors speculating he would seek a more aggressive central bank, driving down the yen. 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.

Marketable Debt

Holdings of Treasuries outside the U.S. rose in February by $13.9 billion, or 0.2 percent, to $5.657 trillion, the 14th consecutive monthly increase, the data show. Foreign investors have boosted their holdings 1.5 percent in the first two months of 2013 after climbing 11.3 percent in 2012 and 12.8 percent in 2011.

The U.S. marketable borrowing reached $11.3 trillion in February, and was up 11.2 percent for all of 2012, Treasury data show.

Foreign investors owned 50 percent of the marketable debt, the least since March 2012, the data, known as Treasury International Capital, show. China held 10.8 percent of the U.S. debt in February while Japan’s stake comprised 9.7 percent of U.S. government obligations, the least since August 2011.

Of the $5.657 trillion Treasuries held outside of the U.S., 71.5 percent, or $4.047 trillion, are owned by official institutions including central banks, finance ministries and other fiscal agents, Treasury data show.

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