China Increases U.S. Bond Holdings, But Doesn't Fall Into The Trap Of Short Term U.S. Bonds

Jun. 22, 2012 3:20 PM ET4 Comments
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Albert Sung is the author of Correlation Economics, monitoring breaking economic news on a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at Ashland, a competitor of Dow Chemical. Today, he works as a regulatory compliance consultant at J&J, but his real passion will stay in macro-economics. His experience in the chemical and pharmaceutical industry allows him to monitor the economy from a process engineering standpoint, analyzing macro-economic charts, correlations and trends.

China has been increasing its U.S. bond holdings in April 2012 (Chart 1). Not much news here.

What's very important to know is that China has actually decreased its short term U.S. bond holdings by 5.1%. China holds $US 3.7 billion short term U.S. paper. On June 2011 China held $US 4.9 billion of short term U.S. paper. So basically all the debt that China holds are long term treasuries now. Interesting to know, China had $US 200 billion in short term U.S. debt in May 2009. So they divested all short term paper to long term paper.

In one of my previous articles I pointed out that short term debt is the most risky asset today, and it's being held mostly by foreigners. When the bond bubble implodes, the defaults will start with short term debt. That's also why the federal reserve is enacting Operation Twist II to sell short term paper and buy long term paper.

But China is smart enough not to buy those short term bonds...

Chart 1: China U.S Treasury Holdings

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