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China’s Treasury Holdings: A Gauge of Foreign Purchases

One of the biggest moves this week was the sharp selloff in US Treasury prices, with Bond prices falling more than 4 1/2 points and reaching their lowest levels since late February. While it had been widely expected that there would be new fiscal stimulus this year, the Georgia Senate election boosted the prospects for an even larger package. The Fed signaled that they may taper asset purchases by the end of the year, which may have pressured Treasury prices as well.

Foreign us treasury holdings

We expect foreign holdings of US Treasuries to become a more important factor in Bond and Note pricing in the months (or years) ahead. The latest Treasury International Capital (TIC) report showed foreign Treasury holdings topping $7 trillion as of the end October. Japan is the largest holder of US Treasuries, a position they have held since June 2019. Their current holdings are well above 2019 levels, due in part to larger issuance, but their October reading of $1.269 trillion was below the record $1.293 trillion from July.

The previous largest foreign holder of US Treasuries was China. They are currently the second-largest holder at $1.054 trillion, and they remain far above any other nation. Still, their October holdings were the lowest since November 2016. In contrast to years in which their holdings were more than $100 billion below China, Japanese Treasury holdings have been more than $200 billion above Chinese holdings for the past four readings.

Japanese Chinese Treasury Holdings

The November TIC report will be released January 19. A decline of $4.8 billion or more in China’s holdings would pull them down to a 10 1/2 year low and could center the market’s focus on this important gauge of foreign demand.

Originally Published on January 8, 2021

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