China, the largest foreign owner of United States Treasury debt, ramped up its holdings of longer-term securities last year at the fastest pace in five years, showing no worries over the sharp rise in US interest rates.
China increased its holdings of Treasury notes and bonds by $US81.1 billion ($A89.1 billion) during 2013 even as it slashed the holdings in December, based on calculations from the latest data released Tuesday on the Treasury Department's website. That represents the biggest calendar-year net increase since a gain of $US123.45 billion in 2009, according to data provided by Ian Lyngen, senior government bond strategist at CRT Capital Group LLC.
Investors are closely tracking China's demand from the $11.8 trillion US government bond market because the Federal Reserve, the largest buyer of Treasurys, has reduced its monthly purchases since the start of the year. Signs that other buyers stepped up could ease worries about rising Treasury yields, which are benchmarks to set borrowing costs for the public and private sectors in the US and abroad.
"China remains a long-term support for the US bond market," said Gennadiy Goldberg, US strategist at TD Securities. "Despite the monthly swings, China has continued to be a big source of demand for Treasurys as it needs a highly liquid market to invest their massive dollar reserves."
Including bills, or US government debt that mature in a year or less, China's overall holdings of US Treasury securities increased by $48.5 billion last year, after taking into account the net reduction of $47.8 billion in December, the first monthly decrease in four months. China's bill holdings fell by $32.6 billion in 2013.
Since the start of 2009, China's holdings of notes and bonds have increased every calendar year except 2011. The nation's stockpile of these securities has climbed by $281.9 billion over that period, providing a steady source of funding for the US government.
The buying reflects China's limited options in parking its massive amount of foreign reserves accumulated from a trade surplus with the US, analysts said. China's foreign reserves rose to $3.82 trillion at the end of December from $3.66 trillion at the end of September and a majority is denominated in US dollars.
Some analysts have argued that it is highly unlikely China would sell its Treasury-bond holdings en masse. Any large-scale selloff not only hurts the US interest by raising long-term borrowing cost for consumers and businesses, but also shrinks the value of its Treasury- bond holdings considerably, they said.
December's cut from China's Treasury-debt portfolio was mostly in bills, a $43.1 billion reduction, while the holdings of notes and bonds fell by $4.66 billion.
The December reduction diluted China's overall holdings of Treasury debt to $1.2689 trillion at the end of last year, down from a record high of $1.3167 trillion at the end of November.
Some analysts said the cut could partly reflect the sell-off in Treasurys in December, which dilutes the value of the holdings.
The benchmark 10-year Treasury note's yield rose by nearly 0.3 percentage points in December, a month when the Fed announced its plan to cut bond buying in 2014 and as optimism over the US economy brightened. The yield rose by over 1 percentage point in 2013 and traded at 3.03 per cent at the end of December, the highest since 2011. When bond yields rise, their prices fall.
So far this year, Treasury yields have dropped and prices rallied amid renewed concerns over the US growth momentum. The benchmark 10-year Treasury yield fell to 2.700 per cent on Tuesday following disappointing US housing and manufacturing reports, down more than 0.3 percentage point for the year.
Aaron Kohli, US interest-rate strategist in New York at BNP Paribas, said it would become a bigger concern if China persistently reduces its Treasury holdings because the Treasury market needs other sources of support with the Fed winding down its bond buying this year.
The Fed now buys $65 billion a month in both Treasurys and mortgage-backed securities, down from $85 billion in December.
- Dow Jones Newswires
