China slashes US debt stake by $180 bil­lion

The Pak Banker - - COMPANIES/BOSS -

To get a sense of how ro­bust de­mand is for US Trea­suries, con­sider that China has re­duced its hold­ings by about $180 bil­lion and the mar­ket barely re­acted.

Bench­mark 10-year yields fell 0.6 per­cent­age point even though the largest for­eign holder of U.S. debt pared its stake be­tween March 2014 and May of this year, based on the most re­cent data avail­able from the Trea­sury Depart­ment.

That's not the dooms­day sce­nario por­trayed by those who said the size of the hold­ings-which peaked at $1.65 tril­lion in 2014 -- would leave the U.S. vul­ner­a­ble to China's whims.

In­stead, other sources of de­mand are fill­ing the void. Reg­u­la­tions de­signed to pre­vent another fi­nan­cial cri­sis have caused banks and sim­i­lar firms to stock­pile highly rated as­sets. Also, mu­tual funds have been scoop­ing up gov­ern­ment debt, flush with cash from savers who are wary of stocks and want an al­ter­na­tive to bank de­posits that pay al­most noth­ing. It all adds up to a mar­ket in fine fet­tle as the Fed­eral Re­serve moves closer to rais­ing in­ter­est rates as soon as next month.

"China may be step­ping away, but there is such a deep and broad buyer base for Trea­suries, par­tic­u­larly when you have times of un­cer­tainty," Bran­don Swensen, the co-head of U.S. fixed-in­come at RBC Global As­set Man­age­ment, which over­sees $35 bil­lion, said from Min­neapo­lis.

Amer­ica has re­lied on for­eign buy­ers as the Trea­sury mar­ket swelled to $12.7 tril­lion in or­der to fi­nance stim­u­lus that helped pull the econ­omy out of re­ces­sion and bail out the bank­ing sys­tem. Over­seas in­vestors and of­fi­cial in­sti­tu­tions hold $6.13 tril­lion of Trea­suries, up from about $2 tril­lion in 2006, gov­ern­ment data show.

China was a par­tic­u­larly vo­ra­cious par­tic­i­pant, boost­ing its hold­ings from less than $350 bil­lion as its econ­omy boomed and the na­tion bought dol­lars to keep the yuan from soar­ing.

Now, the Asian na­tion is step­ping back as it raises money to sup­port flag­ging growth and a crum­bling stock mar­ket, and al­lows its cur­rency to trade more freely. The latest up­date of Trea­sury data and es­ti­mates by strate­gists sug­gest that China con­trols $1.47 tril­lion of Trea­suries. That in­cludes about $200 bil­lion held through Bel­gium, which No­mura Hold­ings Inc. says is home to Chi­nese cus­to­dial ac­counts.

The Peo­ple's Bank of China didn't re­ply to faxed ques­tions on its U.S. Trea­sury hold­ings. China is not alone in trim­ming hold­ings. Ja­panese in­vestors sold a net 1.17 tril­lion yen ($9.4 bil­lion) of long-term Trea­suries in June, the most in two years, ac­cord­ing to data from Ja­pan's Min­istry of Fi­nance and cen­tral bank re­ported Mon­day.

The bench­mark Trea­sury 10-year note yield rose three ba­sis points, or 0.03 per­cent­age point, to 2.19 per­cent at 6:09 a.m. New York time Mon­day, af­ter fall­ing to a two-month low of 2.14 per­cent last week. The yield was at 2.72 per­cent on March 31, 2014.

Politi­cians in both the Repub­li­can and Demo­cratic par­ties have raised con­cern that the amount of U.S. sov­er­eign debt held by China cre­ates an in­her­ent risk.

A su­per-po­lit­i­cal ac­tion com­mit­tee, the Amer­i­cans for Pros­per­ity Foun­da­tion, run by Repub­li­can bil­lion­aire David Koch, joined with the ad­vo­cacy group Cit­i­zens Against Gov­ern­ment Waste to fund tele­vi­sion ad­ver­tise­ments dur­ing the 2012 pres­i­den­tial cam­paign that por­trayed China's own­er­ship of Trea­suries as a threat to U.S. in­de­pen­dence.

And in 2007, Demo­crat Hil­lary Clin­ton, then a Sen­a­tor from New York, said in a let­ter to then-Trea­sury Sec­re­tary Henry Paul­son and then-Fed Chair­man Ben S. Ber­nanke that for­eign own­er­ship of U.S. debt was a "source of great vul­ner­a­bil­ity." The econ­omy "can too easily be held hostage to the eco­nomic de­ci­sions be­ing made in Bei­jing, Shang­hai and Tokyo," she said. The Trea­sury mar­ket over­came tur­bu­lence sparked by China in early 2009, just as the U.S. was ramp­ing up bor­row­ing and as the Fed was about to ex­pand the sup­ply of dol­lars as part of its stim­u­lus ef­forts. At that time, then Chi­nese Premier Wen Ji­abao said his coun­try was "wor­ried" about its in­vest­ment in U.S. debt and wanted as­sur­ances the value of its hold­ings would be pro­tected.

China's pull­back from U.S. se­cu­ri­ties is "far less omi­nous for the prospects for the Trea­sury mar­ket than some sen­sa­tion­al­ists might think," said Ian Lyn­gen, a gov­ern­ment bond strate­gist at CRT Cap­i­tal Group LLC in Stam­ford, Con­necti­cut. "It's the macro and pol­icy sto­ries that give you the big over­all level of rates, it's not flows." U.S. com­mer­cial banks have in­creased their stakes in Trea­suries and debt from fed­eral agen­cies by al­most $300 bil­lion since March 2014 to over $2.1 tril­lion, Fed data show. The cat­e­gory of buy­ers at Trea­sury auc­tions clas­si­fied as in­di­rect bid­ders, which in­clude for­eign in­vestors and mu­tual funds, won a record 55 per­cent of the $1.2 tril­lion of notes and bonds sold this year, up from 43 per­cent in 2014.

Funds bought 42 per­cent of the debt, up from 35 per­cent last year, while over­seas in­vestors in­creased their al­lot­ment to 19 per­cent from 16 per­cent, the data show.

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