China Increased Holdings of Treasuries in July as Yields Surged

China, the largest foreign lender to America, increased its holdings of Treasuries in July as speculation the Federal Reserve will slow purchases pushed U.S. bond yields to the highest level in two years.

China’s stake increased by $1.5 billion in July, or 0.1 percent, to $1.277 trillion, after declining the prior month, according to Treasury Department data released yesterday. Treasuries held by Japanese investors, who have the second largest stake in U.S. government debt, rose to a record.

The growth of China’s holdings comes as overseas holdings of Treasuries have grown $16.3 billion, or 0.3 percent, this year, the slowest pace since a 2 percent decline in the first seven months of 2006. Treasuries have lost 3.7 percent this year, according to Bank of America Merrill Lynch indexes, headed for the worst performance since 2009.

“If real rates back up enough, they come back and buy,” said William O’Donnell, head U.S. government-bond strategist at Royal Bank of Scotland’s RBS Securities Inc. in Stamford, Connecticut, one of 21 primary dealers that trade with the Fed. “The magnitude of the back-up since early May is certainly significant.”

Treasury Selloff

Yields climbed after July 5 when the Labor Department said the U.S. added 195,000 jobs in June, compared with the 165,000 economists had forecast. Fed Chairman Ben S. Bernanke said June 19 that improving conditions might lead policy makers to reduce the size of their $85 billion a month in purchases of Treasuries and mortgage securities.

The benchmark 10-year Treasury yield rose nine basis points or 0.09 percentage point, to 2.58 percent in July. It touched 3.005 percent Sept. 6, the highest since July 27, 2011.

Currency reserves have risen 5.6 percent through June to $3.5 trillion, according to data from the People’s Bank of China. Reserve growth in 2012 was 4.1 percent, the slowest pace since 1998, the data show. Reserves had grown at a double-digit pace for 11 consecutive years.

China’s Treasury position has risen $56.9 billion, or 4.7 percent, this year after a 5.9 percent increase in 2012. The holdings declined 0.7 percent to $1.152 trillion in 2011, the first annual decline on record going back to 2001.

Investors in China held 11.1 percent of the $11.5 trillion of marketable U.S. debt in July, compared with a record 14 percent in June 2009.

Treasuries held by Japanese investors rose for the first time in four months, adding $52 billion, or 4.8 percent, to $1.135 trillion. It was the largest increase since November 2011 following Japanese currency interventions earlier that year.

All foreign investors owned 48.7 percent of the marketable debt, the least since Feb. 2007, the data, known as Treasury International Capital, show.

Holdings of the debt by overseas investors fell by $10.5 billion, or 0.2 percent in July to $5.59 trillion. It was the first four-month decline in overseas holdings since 2001.

Before it's here, it's on the Bloomberg Terminal.