China cuts holdings of US treasury bonds

[Magda Hassan]

China Cuts Holdings of U.S. Treasuries

By The Associated Press

February 16, 2010 "AP" -- Foreign demand drops by record amount; Japan now holds most Treasuries

WASHINGTON - The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.

The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits.

The Treasury Department reported that foreign holdings of U.S. Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5 billion drop in April 2009.

The big drop in China's holdings meant that it lost the top spot in terms of foreign ownership of U.S. Treasuries, dropping to second place behind Japan.

Japan increased its holdings of U.S. Treasuries, boosting them by $11.5 billion to $768.8 billion in December. That amount was higher than China's December total of $755.4 billion, putting Japan back in the top spot in terms of foreign ownership of Treasury securities, a position it had lost in the fall of 2008 when China surpassed Japan.

The $53 billion decline in holdings of Treasury securities came primarily from a drop in official government holdings, which fell by $52.3 billion. The holdings of foreign private investors fell by $700 million during the month of December.

For all of 2009, foreign holdings of U.S. Treasuries dipped by $500 million. In 2008, foreigners had increased their holdings of U.S. Treasuries by $456 billion as a global financial crisis triggered a flight to the safety of U.S. government debt.

That flight to safety had driven down the interest rates that the government was having to pay on its debt to record lows with rates on some short-term securities dipping into negative territory for brief periods.

The Obama administration on Feb. 1 released a new budget plan which projects that the deficit for this year will total a record $1.56 trillion, surpassing last year's record of $1.4 trillion deficit. The trillion-dollar-plus deficit have been caused by a deep recession, which has reduced government tax receipts, and the massive spending that has been undertaken to jump-start the economy and stabilize the financial system.

The administration has pledged to begin addressing the huge government deficits with Obama saying he will soon appoint a commission to recommend ways to trim future deficits.

Overall, the Treasury Department said that foreign net purchases of long-term securities totaled $63.3 billion in December, down from $126.4 billion in November. This category covers Treasury securities and private company bonds.

China's holdings are a result of the huge trade deficits the United States runs with China. The Chinese take the dollars Americans pay for Chinese products and invest them in Treasury securities and other dollar-denominated assets.

American manufacturers argue that China's huge dollar reserve reflect a strategy by the Chinese government to keep its currency artificially low against the dollar as a way to boost Chinese exports and dampen demand in China for American products.

[Jan Klimkowski]

The largest buyer of US debt in 2009 was, wait for it..... Britain.

This makes no economic or other sense.

We're glimpsing the tip of the iceberg of some deep political skulduggery here.

What is going on beneath the waterline, in the chilled and sculpted ice?

At the surface level, this is related to "Quantitative Easing" - ie printing to provide liquidity and relief from toxic assets to major banks. But the deep political solution will be far more complex.

Courtesy of Zero Hedge (with a chart at the url which reveals the extent of British purchases of US debt during 2009):

http://www.zerohedge.com/article/who-bou...uries-2009

Who [Bought|Sold] How Many Treasuries In 2009?
Submitted by Tyler Durden on 02/17/2010 10:35 -0500

Bank of England BOE Japan LBO Quantitative Easing United Kingdom


Yesterday we first pointed out the rotation at the top of foreign US debt holders, with China selling $34 billion in USTs (shifting to a longer duration exposure by selling Bills and buying Bonds) to a new total of $755 billion, and giving up the top US debt holder position to Japan, which with $769 billion in UST holdings regained the top spot for the first time since August 2008. Overall, total foreign debt holdings in 2009 increased by $538 billion, with two unexpected buyers emerging in the face of Japan and the UK, which combined accounted for 58% (or $314 billion) of all 2009 purchases. We say surprising, because it has been long publicized that both countries have their own internal funding issues to grapple with: Japan an uncontrollable deflation and a demographic shift, which would make JGB's a better buying proposition than chasing micro yield in the US, while the UK is engaged in its own version of Quantitative Easing. With the BOE taking on excess supply one wonders how the UK can spare the dime to purchase our own debt (of which we have plenty more to issue in the future)?

Below is a chart that summarizes the change in holdings by major holder.



Summarizing the data:

Japan is the top holder of US debt at $769 billion, a $143 billion increase from a year prior.
Chinese holdings increase by a mere $28 billion, ending the year at $755 billion, and down from a peak position of $801 billion.
Foreign holding were split 23% bills and 77% bonds, compared to 21% bills and 79% bonds at the end of 2008.
And while the change in the top two UST holders was not exactly a surprise considering all the recent jawboning out of China, what was notable was the puke in corporate debt in 2009, of which foreign investors sold a total of $41 billion in 2009, compared to buying of $94 billion in 2008. More on this in a later post. With the roll becoming an issue not only in the UST arena, but in corporate as well, should this defensive posture in corporate debt from external investors persist, then this observation could have even more troubling implications as the LBO wave of 2005-2007 comes due for refinancing.

[David Guyatt]

I wonder if there is an understanding that the UK gets back-door assistance from the US and in return helps to buoy up the dollar by buying Treasuries?

[Jan Klimkowski]

I wonder if there is an understanding that the UK gets back-door assistance from the US and in return helps to buoy up the dollar by buying Treasuries?

That's certainly plausible. The LaRouchies will be trembling with numinous fury.... :2in1:

Whatever is going down presumably has a strong geopolitical tinge.

It's also prima facie market manipulation.

But then market manipulation is the sine qua non of C21st global financial markets.... :evil: