Data on foreign holdings of U.S. government bonds released late Wednesday drew attention amid worries that Beijing could move to sell a chunk of its Treasurys stockpile as a retaliatory measure against the Trump administration’s tariffs.
But market participants say the U.S. Treasury Department’s March data on foreign holdings, in fact, demonstrated why China dumping U.S. government paper would be one of the more ineffective forms of retaliation in a trade dispute. Instead, a rise in overall foreign holdings underlined the appetite for haven assets such as government paper during periods of uncertainty or turmoil.
“Treasurys still remain one of the best havens for investors,” said Marvin Loh, global macro strategist at State Street, who said foreign investors had few choices when it came to positive-yielding safe assets.
The widely-watched Treasury International Capital report showed that China’s stockpile of U.S. government bonds fell by $10 billion to a two-year low of $1.12 trillion in March, marking its first decrease in four months.
Some investors have raised concerns that the People’s Bank of China would dump a portion of its Treasury holdings, the backbone of its foreign-exchange reserves, in an effort to raise the U.S. federal government’s borrowing costs when Washington is facing annual deficits of over $1 trillion. Such fears gained ground earlier this week after an editor from the Global Times, a Chinese state-owned newspaper, tweeted that there were discussions in China on selling Treasurys to fight back against the Trump administration’s tariffs.
Yet despite the U.S.’s largest creditor selling a slice of its Treasury hoard, the overall value of U.S. government paper held by overseas central banks, sovereign-wealth funds and foreign government institutions rose on net by $45 billion to $4.07 trillion in March.
And on a broader measure of foreign holdings that includes private investors, ownership of Treasurys rose by $88 billion, the largest monthly increase since Sep. 2011.
Jon Hill, an interest-rate strategist at BMO Capital Markets, wrote the increase in overseas buying may have led Treasury prices to rise, and their yields to fall, at the end of the first-quarter.
Over that month, the 10-year Treasury note yield TMUBMUSD10Y, -0.74% slumped around 30 basis points to 2.42% at the end of the month. Since then, the benchmark bond rate has traded around the 2.40% level. Bond prices move in the opposite direction of yields.
And it can be difficult to decipher China’s motivations behind reducing its Treasury holdings in the first place.
Brad Setser, an expert on capital flows and a senior fellow at the Council on Foreign Relations, tweeted that China may have simply recycled the proceeds from selling Treasurys into other creditworthy securities like agency mortgage-backed bonds.
Also an important difference between China selling reserves and Treasuries to limit a CNY depreciation (which is disinflationary/ contractionary for the world, and thus puts pressure on Fed to cut) and China just selling Treasuries to change its reserve holdings … https://t.co/N7EWjvdqTh
— Brad Setser (@Brad_Setser) May 15, 2019
In that case, Beijing would be diversifying its portfolio of foreign-exchange reserves, a move that would have little impact on the U.S.’s exchange rate with the Chinese yuan USDCNY, +0.4358% Setser said that the country’s foreign reserves and the yuan were largely unchanged in March, the month when China’s Treasurys holdings fell.