Justin Lederer Comments: China’s Treasuries Rise To Five Month High As Japan Keeps Pace

December 18, 2012, Bloomberg News

China, the largest foreign lender to the U.S. government, increased its Treasuries holdings in October to a five-month high, while Japan, the second largest holder, kept pace.

China’s position in the debt increased $7.9 billion, or 0.7 percent, to $1.16 trillion, U.S. Treasury Department data released yesterday show. Japan’s holdings rose $5.2 billion, or 0.5 percent, to a record $1.13 trillion. For the year, Japan has purchased $76.7 billion of the securities, more than any other country, compared with $9.6 billion for China.

Rising demand for the debt from the largest holders followed the Federal Reserve’s Sept. 13 decision to increase its support for the U.S. economy by purchasing $40 billion a month of mortgage-backed securities and on concern the European debt crisis hasn’t been contained.

“You continued to see some pretty weak data over here and it didn’t seem like anything was getting any better in Europe,” said Thomas Simons, a government-debt economist in New York at Jefferies & Co., one of 21 primary dealers that trade with the Fed. That made buying U.S. government debt “something of a reflex,” Simons said.

The 10-year note yield climbed six basis points, or 0.06 percentage point, to 1.76 percent in New York, the highest level since Nov. 2, according to Bloomberg Bond Trader prices, on speculation officials in Washington were making progress on a budget deal.

While China holds $26.8 billion more Treasuries than Japan, that gap has narrowed from $429.7 billion in July 2011, Treasury data show. At the 2012 pace of buying, Japan may overtake China as the largest holder of U.S. government debt in February.

Holdings of Treasuries outside the U.S. rose in October by $6 billion, or 0.1 percent, the smallest increase since December 2011 when foreign ownership declined, the data show. Foreign investors have boosted their holdings 9.6 percent through October after climbing 12.8 percent in 2011.

The U.S. marketable borrowing reached $10.89 trillion in October, and was up 9.6 percent this year, Treasury data show.

Foreign investors owned 50.4 percent of the marketable debt, the least since May, the data, known as Treasury International Capital, show. China held 7.9 percent of the U.S. debt, its smallest share since March 2008. Japan’s stake comprised 10.4 percent of U.S. government obligations, the least since October 2011.

“There are many concerns out there about the global economy and the U.S. economy,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, a primary dealer.

With the budget-deficit talks becoming a more urgent concern as the Dec. 31 deadline nears, foreign purchases may have climbed after the election “given the rally and ahead of the fiscal cliff,” Lederer said. “It’s the continued safe- haven bid.”

Of the $5.48 trillion Treasuries held outside of the U.S., 72 percent, or $3.96 trillion, are owned by official institutions including central banks, finance ministries and other fiscal agents, Treasury data show.