China | US Treasury market barely notices China's bond sales

US Treasury market barely notices China’s bond sales

August 10, 2015 3:35 PM (UTC+8)

 

Many candidates running for president of the US have been railing at the threat posed by China and its potential to hold the US economy hostage.

Since facts have become an early casualty of next year’s US election, it’s not that shocking to hear that China has been selling bonds at a significant rate and the US Treasury market barely noticed.

Since March 2014, around the time China’s holdings of US Treasurys peaked at $1.65 trillion, through May 2015, China reduced its holdings by $180 billion, according to the US Treasury Department’s most recent data, reported Bloomberg.

The yield on the benchmark 10-year bond fell from 2.72% on March 31, 2014, to 2.19% Monday. Since bond yields fall when prices rise, it appears there is plenty of global demand ready to pick up what China is selling.

So much for the US having to cater to China’s whims.

Since the financial crisis, banks have been required to hold highly rated assets. And retail investors have been pouring money into mutual funds and ETFs that hold government debt.

“China may be stepping away, but there is such a deep and broad buyer base for Treasurys, particularly when you have times of uncertainty,” Brandon Swensen, the co-head of U.S. fixed-income at RBC Global Asset Management, told Bloomberg.

In order to fund economic stimulus and end its recession after the financial crisis, the US boosted the Treasury market to $12.7 trillion. Overseas investors and institutions hold nearly half that, $6.13 trillion, up from just $2 trillion in 2006.

The latest update of Treasury data and estimates by strategists suggest that China controls $1.47 trillion of Treasurys, reported Bloomberg. That includes about $200 billion held through Belgium, which Nomura Holdings says is home to Chinese custodial accounts.

Japanese investors have also been net sellers, selling $9.4 billion of long-term Treasurys in June, the most in two years, according to data released Monday from Japan’s Ministry of Finance and central bank.

Global investors like to own US Treasurys because of their safe haven status in times of economic trouble, such as the Greek/Euro crisis and the falling Chinese stock markets.

In addition, Treasurys give some of the highest yields in the developed world. Compared to 2012, when yields were practically the same, 10-year Treasury notes currently yield 1.5 percentage points more than similar German bunds.

Unlike “China’s central bank, global investors want to buy,” Toshifumi Sugimoto, the Tokyo-based chief investment officer at Capital Asset Management, told Bloomberg. “Investors like pension funds or life insurance companies or institutional investors, they want a higher yield with a high rating. U.S. Treasuries are very attractive now.”

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