China, the largest foreign U.S. creditor, boosted its holdings of government securities in May to the most in six months as the American economy stalled and Europe’s sovereign-debt crisis deepened.
Chinese holdings rose 0.4 percent to $1.1696 trillion, Treasury Department data released yesterday show. Those of Japan, the U.S.’s second-largest lender, climbed 1.4 percent to an all-time high of $1.1052 trillion. Net foreign purchases of Treasuries increased $54.2 billion, or 1 percent, to a record $5.264 trillion in May, the data show.
“From China’s perspective, U.S. Treasuries are of much lower risk compared with holding European bonds,” said James Su, who oversees $50 million of fixed income assets as a fund manager at SinoPac Asset Management in Hong Kong. “It’s also linked to stronger exports to the U.S. relative to Europe.”
Investors continued to seek a haven in U.S. Treasuries in May as concern mounted regarding the potential need for Spain to seek a bailout and amid uncertainty whether a party seeking to cancel the terms of earlier bailouts would win elections in Greece. The balloting was seen as a referendum on whether the country would stand by its international-bailout commitments.
China’s first-half exports rose 9.2 percent from a year earlier, lower than the government’s target of expanding trade by 10 percent, the nation’s customs bureau data said on July 10. Sales to the European Union fell 0.8 percent in the first six months, while U.S. exports rose 13.6 percent.
Yields on benchmark 10-year Treasury notes dropped to a record low of 1.44 percent on June 1 after U.S. employers added the fewest workers in a year in May and as the Fed pledged to keep borrowing costs close to zero to sustain economic growth.
“Slowing U.S. growth and increasing uncertainty about Greece is what caused more private and official demand,” said Shyam Rajan, an interest-rate strategist in New York at Bank of America Merrill Lynch, one of the 21 primary dealers that trade with the Federal Reserve. “U.S. data has actually gotten weaker since.”
The data showed China held $1.1644 trillion of Treasuries in April, an increase from the $1.1455 trillion reported for the period on June 15. The Treasury is revising holdings data on a monthly basis rather than annually based on the nationality of the beneficial holder of the debt, while the initial data will still count the location of the purchase. For the year, China’s holdings have risen 1.5 percent.
China’s holdings of short-term Treasury bills increased 97 percent in May to $7.3 billion from $3.7 billion the month before.
Demand from Asia “is another component that’s going to push the Treasury market higher in price,” said Sean Simko, who oversees $8 billion at SEI Investments Co. (SEIC:US) in Oaks, Pennsylvania. “There’s larger issues in Europe than in the states, and with where our government securities are trading, there’s still more room for Treasuries to run.”
China’s policy makers have advocated diversification of the nation’s foreign-exchange reserves away from U.S. assets after more than doubling its holdings of Treasuries since 2007 in the wake of the global financial crisis.
Treasuries have returned 2.8 percent this year, according to the Bank of America Merrill Lynch Indexes.
The Fed remains the top holder of U.S. debt with $1.66 trillion. The central bank said on June 20 it would increase to $667 billion from $400 billion its program of extending the average maturity of the Treasuries on its balance sheet by selling short-term securities and buying an equal amount of longer-maturity Treasuries. Traders call the program Operation Twist after a similar effort in 1961 to contain borrowing costs for companies and consumers.
Net buying of long-term equities, notes and bonds totaled $55 billion during the month, compared with net purchases of $27.2 billion in April, the Treasury said in Washington. Economists surveyed by Bloomberg News projected net buying of $41.3 billion of long-term assets, according to the median estimate.
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