Wednesday, February 17, 2010 0 comments ++[ CLICK TO COMMENT ]++

China starting to unload some US debt

The amount in question is still small but I'm not sure if this is change of strategy or a short-term blip:

Foreign demand for U.S. government bonds and Treasury bills tumbled by the largest amount on record in December, according to monthly data from the U.S. Treasury Department. And China led the way, cutting its holdings by $34.2-billion (U.S.) and relinquishing its title as the world's largest holder of U.S. government debt to Japan.

In recent months, top Chinese officials have expressed growing unease about the ability of the United States to finance its swelling debt, without triggering a major devaluation of the dollar.

China has now cut its holdings of Treasuries by $45-billion over the past five months, or “a long enough period to hint strongly at a trend,” Alan Ruskin, chief international strategist at RBS Securities Inc., said in a research note.

And while China was pulling out of U.S. Treasuries, many other Asian countries were adding to their holdings. Japan boosted its Treasury investments to nearly $769-billion, up $11.6-billion. Hong Kong, a special administrative region of China, boosted its holdings by $6.7-billion to nearly $153-billion. Canada, Britain, Singapore, Thailand, and Australia also added to their holdings.

And overall foreign demand for U.S. long-term securities remains strong, with net purchases of $63.3-billion in December.

Although the buyers and sellers may change, the asset price hasn't moved much in over 6 months. The following chart plots the 10 Year US Treasury bond yield (note that bond yield is inversely related to bond price.) As one can see, the yield isn't as low as it was in early 2009 but it is nowhere near what it was in 2007 either. The current yield of 3.742% was roughly the average in 2008 (post-real-estate-bust but pre-Lehman.)


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