July 19 (Bloomberg) China boosted its holdings of U.S. government debt to $1.16 trillion in May as the trade surplus between the countries reached a six-month high and the Asian nation’s currency reserves climbed to a record.
Note and bonds rose by $8.2 billion, or 0.7 percent, to a record $1.157 trillion, while China reduced its holdings of bills by $900 million to $3 billion, according to the Treasury Department data released yesterday. China, the largest foreign lender to the U.S., bought more as the Federal Reserve prepared to complete $600 billion in purchases in June.
The increase in purchases came as China’s trade surplus with the U.S. rose to $25 billion in May, the most since November, after falling to a 12-month low of $18.1 billion in March, the Commerce Department said July 12. China’s currency reserves rose to $3.2 trillion in June, up 5 percent from March, according to China’s National Bureau of Statistics.
“As they generate dollars, they ultimately have to invest them in something,” said Larry Dyer, a U.S. interest rate strategist with HSBC Holdings Plc in New York, about China’s Treasuries buying. “The size of the Treasury market makes it one of the few things that can absorb their flows without having a significant price reaction.”
China’s holding of Treasuries peaked in October at $1.175 trillion as Treasury yields rallied toward record lows when investors speculated on the size of the Fed’s purchase program, which Goldman Sachs Group Inc. had forecast at $2 trillion.
The build-up in longer-term holdings and the contraction of shorter-term assets reflects a shift in China’s Treasury holdings to emphasize longer-term assets after it raised its position in bills, which are the most-liquid and also lowest- yielding government securities, to $210.4 billion in May 2009.
Since its total holdings peaked in October, China has added $27.4 billion of longer-term notes and bonds to its portfolio while reducing the T-bills on its books by $42.9 billion.
“They still want to be in the most liquid market out there,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York. “There’s a natural need and interest for these guys to buy the U.S.”
Treasury purchases from the U.K. rose by $13.5 billion, lifting holdings there to $346.5 billion, Treasury data show. That increase in U.K. buying may also reflect rising demand for the debt from China, as investors from the world’s most populous nation execute trades through the U.K.
The Treasury’s initial reports on international purchases are based on the location where the transaction occurs, while subsequent revisions are based on location of the beneficial owner.
Overall foreign demand for Treasuries rose at the fastest pace this year, increasing by 0.6 percent to $4.51 trillion, the 25th consecutive month of gains, according to Treasury Department data. China, the largest foreign holder of Treasuries, bought $7.3 of U.S. government debt, and increased its longer-term holdings to $1.16 trillion, while Japan, the second largest overseas lender, boosted its position by 0.6 percent to $912.4 billion.
Investors continued to buy Treasuries as yields fell amid signs of slackening U.S. economic growth and as the European sovereign debt crisis worsened. President Barack Obama and Republicans in Congress showed no signs of being able to reach an agreement to curb the growth of U.S. debt and reduce spending, as the U.S. is poised to run its third budget deficit of more than $1 trillion.
--Editors: Paul Cox, Dave Liedtka
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