(Updates with economist’s comment in sixth paragraph.)
Feb. 19 (Bloomberg) -- China, the largest foreign U.S. creditor, reduced holdings of U.S. Treasury debt in December by the most in two years as the Federal Reserve announced plans to slow asset purchases.
The nation pared its position in U.S. government bonds by $47.8 billion, or 3.6 percent, to $1.27 trillion, the largest decline since December 2011, according to U.S. Treasury Department data released yesterday. At the same time, international investors increased holdings by 1.4 percent, or by $78 billion, in December, pushing foreign holdings to a record $5.79 trillion.
Yields on benchmark 10-year notes rose to 3 percent in December, the most since July 2011, after Fed officials announced plans to begin scaling back the central bank’s bond purchase program, designed to keep borrowing rates low and jump start the U.S. economy. The prospect of tapering sent U.S. government securities down 3.4 percent in 2013, the first annual decline since 2009’s record 3.7 percent loss, the Bank of America Merrill Lynch U.S. Treasury Index shows.
“The Chinese move to sell suggests central banks are becoming more wary of taking duration risk now with the Federal Reserve firmly into the tapering process,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 22 primary dealers that trade with the Fed. “If China continues to sell again in the next month or two, than more worries will arise as to who will buy the country’s debt.”
Overseas investors held 48.8 percent of the $11.9 trillion in publicly tradable U.S. government debt outstanding at the end of 2013. For all of 2013, foreign holdings of Treasuries rose 4 percent or by $221.1 billion, the smallest rise since 2006.
China is trying to “reduce its dependency on Treasuries,” Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc, told Bloomberg Television in Hong Kong today. “It’s hard for them to do that, because the U.S. is still by far the most liquid market and it’s actually not so easy to find room for all those billions of dollars of Chinese reserves.”
Chinese holdings of U.S. government debt rose 4 percent last year, the second annual gain after falling in 2011 for the first time on record, Treasury data show.
The Fed trimmed its $85 billion of monthly bond buying by $10 billion in January and again in February. Economists estimate that pace will continue until the central bank ends the program at the end of the year.
Treasury holdings in Japan, the second-largest overseas lender to the U.S., rose for the sixth consecutive year, climbing 6.4 percent, or by $71.3 billion, to $1.18 trillion, Treasury data show. The country’s investors pared their position by $3.9 billion, or 0.3 percent, in December.
“Treasuries were largely well-positioned to receive the December tapering announcement,” Gennadiy Goldberg, U.S. strategist at primary dealer Toronto-Dominion Bank in New York, wrote in a note to clients.
--With assistance from James Mayger in Tokyo and Angie Lau in Hong Kong. Editors: Dave Liedtka, Paul Panckhurst