Tuesday, February 16, 2010

Foreign holdings of U.S. Treasuries: was it really that bad? No.

I can’t believe that the Financial Times can get away with this. From the FT, titled Foreign demand falls for Treasuries:
Foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday.

China sold $34.2bn in US Treasury securities during the month, the US Treasury said on Tuesday, leaving Japan as the biggest holder of US government debt with $768.8bn. China overtook Japan as the largest holder in September 2008.
I don't know what foreign demand is (these are net flows, so it could likewise be a product of domestic supply and/or demand), but foreign holdings of US Treasuries grew! In December, foreign holdings for US Treasury securities – official and private holdings of US Treasury bonds/notes + US Treasury bills – increased by $17 bn over the month (you can see the major holders by country here, or the total on the press release, lines 5+10+23).

And lookie here, China dropped its overall holdings , yes, but the article fails to mention the shift in holdings by other key countries that offset completely China's sell-off. In December, the UK and Japan jointly increased their holdings by more than China dropped its holdings, + $US 36.4 bn vs. -$US 34.2 bn.

And finally, China's current portfolio is really not that difference from recent history. China's December share of US Treasury holdings, 20.9% (as a % of total foreign holdings), is barely off its 2007-2009 average, 21.4%. But Japan's holdings are way off, and could revert towards the average, 23.7%.

The FT's coverage of the TIC report does not do justice to the undertones of this massive release (especially the China piece, in my view). More TIC analysis to come tomorrow…

Rebecca Wilder


  1. why such a fuss over december figures after thiis last week:

    China orders retreat from risky assets - China has ordered managers of its vast currency reserves to withdraw from risky dollar assets and retreat to core debt guaranteed by the US government, a clear sign that Beijing is battening down the hatches for fresh trouble on global markets. A Communist Party directive leaked to the Chinese-language edition of the Asia Times said dollar reserves should be limited to US Treasuries or agency mortgage debt such as Freddie Mac that enjoys Washington's implicit backing. BNP Paribas said the move has major implications for global risk assets. "The message from Beijing is that we don't like this environment," said Hans Redeker, the bank's currency chief.


    The Dumping Begins: Chinese Reserve Managers Notified That Any Non-USG Guaranteed Securities Must Be Divested - It appears that this time China's posturing is for real. Following up on our earlier post that Chinese military officials want to "punish" America by selling Treasuries, Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt. And from following TIC data we know that China's enthusiasm for MBS/Agencies over the past year has been matched solely by that of one Bill Gross. From Asia Times: Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events


  2. Hi rjs,

    In the second report, the article states: "Chinese military officials want to "punish" America by selling Treasuries"

    I never know exactly what this means. The Chinese cannot sell out of Treasuries and risk a free-fall of around 60% of their FX portfolio (however big that is because a lot of it is unmeasured and definitely exceeds the $2.4 tn mark). Secondly, Americans are saving more, and so are Europeans - point is, there's a lot of new demand to pick up the slack, so that the net effect may very well be close to zero.


  3. Fully agreed that the reporting on these events is not correct and does not do justicie to the main developments. See the linked article for an overview of how the foreign holding of US treasury securities has developped, especially for China and Japan, during the last 10 years.


  4. To be sure, it's possible that they sold off in the month of December in retaliation against the Obama administration; but that will not last long. It's also possible that they are simply increasing duration and risk (they have been buying stocks, too). Rebecca

  5. Thanks for the in-depth coverage on China and the modulated responses. aj

  6. This is an astute move by the Chinese. Dollar strength is inversely related to foreign short-term claims. Avoiding the Treasury market will mean higher interest rates. Higer interest rates portend a stronger dollar. The Chinese have supported the recent move in equities. And a strong dollar is associated with a higher volume in China's exports.

  7. The strength in stocks will subside. We are headed for a double top. At the end of April or the beginning of May we will have a sell off.

  8. Oh, the usual yearly plunge and recovery of bygone years....

  9. This guy seems to agree:

    "The Treasury debt China doesn’t want these days is the short-term stuff, meaning T-bills maturing in one year or less. The country’s holdings of T-bills plunged to $69.7 billion in December from $108.5 billion in November and $210 billion in May, according to Bloomberg News data.

    T-bills, of course, pay next to nothing because the Federal Reserve continues to hold its benchmark short-term interest rate near zero. The current annualized yield on three-month T-bills is 0.09%. The Chinese appear to be figuring that they can do better than that yield in other investments -- including in longer-term Treasuries"
    -- Tom Petruno

  10. Rebecca and all:

    I'm impressed to see others doing a survey of the Press to assess the validity of Rebecca's claim. I too have issues with some of the FT's reporting, but that pretty much applies to the general press.

    From the quick canvass I've done, the results appear split, but then again, a lot of what the Press writes is plagiarized from the others!

    So to counter the presumed authority of the FT, I proffer this from the WSJ:

    SINGAPORE -- China may be back in second spot among the largest foreign holders of U.S. Treasurys, but it's not moving aggressively to shift away from U.S. dollar assets.

    Beijing has for some time been diversifying its newly-created foreign-exchange reserves, going into currencies like the euro. That doesn't mean it's about to dump the dollar.

    For one thing, it would be counterproductive for a country which still holds so much in dollar assets (estimated at 70% of its total reserves). And the euro is hardly an appealing alternative right now.

    Data out Tuesday in the U.S. showed China was a major net seller of Treasurys in December, while Japan was a net buyer, moving into top spot. That's as foreigners remained good buyers generally of U.S. assets.

    Coming at a time of trade tensions between China and the U.S., and with President Barack Obama adding to the fray with his plan to meet the Dalai Lama this week, the data have raised concerns that Beijing is hastening its long-standing plan to better manage its large U.S. dollar holdings.

    In reality, China will tread carefully and the diversification process will remain gradual. For all its carping in 2009 about weakness in the dollar and the need to find long-term alternatives (Beijing corralled its BRIC counterparts of Brazil, Russia and India to make the same noises), there's been no significant move out of the greenback. ][...]

  11. rebecca, i think that the zero hedge reference to the previous post was just to make that post into a "continuing" saga...my understanding is that a few generals upset with the arms deal to taiwan demanded that US holdings be dumped, but i doubt they had any influence on policy...

    i have no special insight, only what i read...you site FT; ive seen similar headlines about the december report from at least 3 other sources...but my point was, that was only a one month change, and several articles i ran into last week indicated that the euro mess was driving china, and everyone else for that matter, back into treasuries...

    here's a few more from last week:
    http://www.zerohedge.com/article/asia-times-david-goldman-discusses-imminent-chinese-asset-dump (video)

  12. it occurs to me you'd be interested in econompic's take on the dec numbers..


  13. just stopping back here in because mike pettis has an excellelent article re the reaction to the TIC data: What the PBoC cannot do with its reserves - (excerpt)
    More importantly, the TIC numbers completely fail to disclose whether China’s reduced holding of USG bonds was matched by increased holding of other dollar assets, thereby increasing the pool of capital available to fund USG bonds by an amount equal to its reduced Treasury holdings. If Chinese investors decide to take on more risk, for example, they might sell USG bonds and use the proceeds to buy corporate bonds. Of course the seller of these corporate bonds will then have cash, which must be put to work, and ultimately this ends up back in the USG bond market.

    China did not reduce its dollar holdings

    So was China a net seller of dollar assets in December? Almost certainly not. Just look at the PBoC balance sheet. PBoC reserves rose in December by $61.3 billion, of which $39.0 billion was the trade surplus.

    Remember that China has a large current account surplus which necessarily must be recycled abroad, and the US has a large current account deficit which necessarily must be funded abroad. It would be astonishing if, under these circumstances, total Chinese holdings of USD assets declined, and of course it is impossible that they declined faster than the willingness of other foreigners to replace them.


  14. Thanks rjs. I think that I will upload this link (along with Econompic, Setser, and Pettis). Rebecca

  15. In order to let the yuan appreciate against the US dollar, China has to reduce it holdings of treasuries.  So why all this alarm and show of bravado when China is rebalancing GRADUALLY as it says it would.  


Note: Only a member of this blog may post a comment.