The US Treasury released its data on foreign holdings of US Treasury bonds yesterday, and CNBC is running with the story that China is no longer the largest holder of US Treasury bonds and indeed has been a net seller of the long end. There may be a negative reaction to the headlines now running on this data release. However, the facts are a little less startling than the headlines would suggest.
Firstly, what is true is that China’s holdings are now less than the government’s other major creditor – the US Federal Reserve. However, this is a result of quantitative easing in the US and not China’s reserve management policies.
Secondly, yesterday’s Treasury International Capital (TIC) data shows an increase in Chinese holdings in the month to 31st October from $883.5bn to $906.8bn. – an increase of ‘only’ $23.3bn. Moreover, some analysts are giving attention to the fact that holdings of short-term Treasuries rose $25.4bn – with holdings of long-term bonds actually falling $2bn.
However, a broader view of the data provides a less worrying picture –
Major Foreign Holdings of Treasury Securities
As you can see, the series is notoriously volatile. Moreover, the TIC data has reported net monthly declines in China’s total holdings in the past. So a small decline in holdings at the long end is not particularly startling. Secondly, the $23.3bn monthly increase in total US Treasury holdings by China in October was actually the largest monthly increase this year. No Chinese departure from the Treasury market there.
Finally, as the second two columns show, total global holdings of US Treasuries by all foreign entities continue to rise. This data set looks different if you look at net purchases, adjusting for US purchases of foreign bonds. However, if we are attempting to analyze the appetite for US government debt amongst foreign buyers then it is the raw outright numbers that matter. And it is clear that foreigners clearly continue to have an appetite for Treasuries. The same is true of China.
There may be an overreaction to the headlines now being associated with these numbers. However, if that proves to be the case, it is probably a buy opportunity. Indeed, the yields levels now on offer are beginning to look attractive.
Disclosure: I am long IEF. I am long US 10-year notes.