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Foreign appetite for Treasuries falls, China holdings at six-month low: data

Published 03/15/2018, 05:43 PM
Updated 03/15/2018, 05:50 PM
Foreign appetite for Treasuries falls, China holdings at six-month low: data

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - Foreign holdings of U.S. Treasuries declined for a third straight month, as China's fell to a six-month low, data from the Treasury Department showed on Thursday, hurt by rising interest rates that have eroded the value of their investment.

Their holdings of U.S. government bonds and notes fell to $6.26 trillion in January, down $24.5 billion from $6.28 trillion the previous month.

Gennadiy Goldberg, interest rates strategist at TD Securities in New York said this has been an ongoing trend as higher interest rates have made holding U.S. Treasuries more expensive on a currency-hedged basis.

With the Federal Reserve already tightening U.S. monetary policy and other central banks yet to start, yields on U.S. Treasuries are trading at a wide premium over their counterparts.

Analysts said hedging costs, which have sharply increased the past few months, have nullified the yield advantage offered by U.S. Treasuries.

(GRAPHIC: China, Japan Holdings of U.S. Treasuries - http://reut.rs/2DFLnLD)

In addition, the decline in foreign demand was also partly due to central banks tapering off their bond purchase program.

The sell-off in Treasuries contributed to the overall rise in yields in January. Benchmark U.S. 10-year yields (US10YT=RR) started the month at 2.465 percent and ended at 2.720 percent.

Late on Thursday, U.S. 10-year yields were at 2.829 percent.

Data also showed China's holdings of Treasuries declined to $1.168 trillion in January, their lowest in six months. China remains the largest non-U.S. holder of Treasuries.

Analysts said U.S. President Donald Trump's plan to slap stiff tariffs on imported steel has fueled fears that some trading partners such as China and Japan might retaliate by dumping U.S. Treasuries.

Japan, meanwhile, was the second-largest non-U.S. holder of Treasuries, with $1.065 trillion in January, slightly up from $1.061 trillion in December, according to the data. Prior to January's rise, Japan holdings of the U.S. asset have fallen for five straight months.

U.S. stocks, meanwhile, saw inflows of $34.45 billion in January, the largest since May 2007. Foreigners bought U.S. equities for five straight months. The inflows were in line with record levels for U.S. stocks indexes last year.

Data further showed that offshore investors purchased $62.1 billion in long-term U.S. assets after buying a revised $23.3 billion in December. Including shorter-dated securities, overseas bought $119.7 billion in January, after selling a revised $122.5 billion in December.

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