China, Japan Dump Major Holdings of U.S. Treasuries

China’s stockpile of U.S. government debt plunged to $1.16 trillion in September 2016

China, the biggest foreign holder of U.S. government debt instruments, is dumping its holdings of U.S. Treasuries in its efforts to support the yuan and prevent its further devaluation. China’s stockpile of U.S. government debt, comprising bonds, notes and bills, plunged to $1.16 trillion in September 2016, from $28.1 billion in August 2016, according to U.S. Treasury Department data released on November 16th, 2016, and as reported by Bloomberg. The massive selloff brought China’s holding of U.S. Treasuries to the lowest level since September 2012. Consequently, China’s foreign reserves, the world’s largest stockpile, were down to $3.12 trillion from a record $4 trillion in June 2014.

The U.S. Treasury Department data also showed that net foreign selling of long-term securities totaled $26.2 billion in September 2016. As a result, the total cross-border outflow, including short-term securities such as Treasury bills and stock swaps, amounted to $152.9 billion for the month. Net foreign selling of U.S. Treasuries was $76.6 billion in September and $3.21 billion in equities, while foreigners purchased $1.08 billion of corporate debt and $32.1 billion in agency debt, according to Bloomberg.

Source: Federal Reserve data
Source: Federal Reserve data

Apart from China, Japan, the second largest holder of U.S. Treasuries, is also dumping its holdings of U.S. government debt for a second straight month. Japan’s holding of U.S. Treasuries fell $7.6 billion to $1.14 trillion in September 2016. Likewise, the U.S. Treasury holdings of Saudi Arabia declined for an eighth straight month to $89.4 billion.

Dumping of U.S. papers points to worrisome trend

The U.S. Treasury Department’s latest data points to the worrisome trend that foreign central banks, sovereign wealth funds, and reserve managers have continued their liquidation of U.S. papers held in the Fed’s custody account. During July 2015 to July 2016, foreign central banks have sold a whopping $343 billion of U.S. Treasury bills, a new all-time high.

Back in August 2016, China was among the biggest sellers of U.S. Treasury papers, on a market-price basis, having sold $34 billion in U.S. Treasuries, the biggest monthly dump since 2012, and bringing its total Treasury holdings to $1.185 trillion, mainly to offset devaluation pressure.

Source: Federal Reserve data
Source: Federal Reserve data

China sold an estimated $570 billion in foreign-exchange assets from August 2015 to August 2016 in an effort to prop up the yuan. As a result, China’s foreign-exchange reserves fell $16 billion to $3.19 trillion in August 2016, and are down from a peak of close to $4 trillion in 2014. The reserves dropped another $19 billion in September 2016 to the lowest level since 2011.

On a similar vein, Saudi Arabia also continued to sell its U.S. Treasury papers; in August 2016, its stated holdings dropped from $96.5 billion to $93 billion, the lowest since 2014. Saudi Arabia is liquidating its U.S. papers to provide the funds needed to offset the collapse of the petrodollar, and to backstop the country’s soaring budget deficit.

Source: Federal Reserve data
Source: Federal Reserve data

The recent massive sell-off of U.S. Treasuries resonates with the record declines in high-grade global government bond yields, and reflects concerns over sluggish global economic growth and the limits that major central banks are facing to boost growth through the infusion of monetary stimulus into the economy. Central banks are mopping up whatever positive-yielding debts are available in the markets, thereby creating more downward pressure on yields globally.

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