Japan tops China as No. 1 holder of USA bonds

Japan tops China as No. 1 holder of USA bonds

(Photo: FRED DUFOUR, AFP/Getty Images)

Adam Shell , USA TODAY 

December 19, 2016

Corrections & clarifications: An earlier version of this story misstated dollar amounts when describing how much China’s holdings of U.S. Treasury securities fell from September to October of 2016. The dollar figure was also incorrect for how much securities fell since October 2015.

Japan has overtaken China as the biggest owner of U.S. government bonds, the latest sign that China is reducing its Treasury holdings to support its currency, the yuan, which has come under pressure from capital fleeing the mainland in search of investment opportunities.

At the end of October, Japan held $1.13 trillion of U.S. government debt, according to the U.S. Treasury, topping China's holdings, which totaled $1.12 trillion — its smallest helping of U.S. debt since 2010.

China's holdings of U.S. Treasury securities fell $41.3 billion from September 2016 to October 2016 and are down $139.1 billion since October 2015, Treasury data show. China's holdings of U.S. debt have fallen five straight months.

The main reason China is liquidating part of its huge stake in U.S. debt is to prevent a sizable decline in the yuan.

"China is selling Treasuries to support its currency, which is under pressure due to capital flight," says Axel Merk, chief investment officer at Merk Investments.

The yuan has lost 7% of its value vs. the U.S. dollar this year. One dollar buys 6.96 yuan, up from 6.49 yuan at the end of 2015. The dollar spiked after Wednesday's interest rate increase by the Federal Reserve and hints from the Fed that three more rate hikes are to come in 2017.

In contrast, Japan's central bank prints money to stimulate its economy, and some of that cash finds its way back into the U.S. government bond market, helping to elevate Japan to the No. 1 spot in foreign holders of U.S. debt, Merk says.

Stock pros: Own these stocks in 2017

China's currency is sliding in value as Chinese investors look to purchase financial assets, such as stocks, real estate and bonds, in countries outside China in hopes of reaping larger returns. In essence, they're buying more foreign assets than Chinese assets.

"The Chinese middle class is growing, and there's money to invest, but there aren't many opportunities to invest locally," Merk says. "There's the option to take money abroad, and that's exactly what many in China are trying to do."

As more cash flees China, the Chinese government must raise cash by selling its holdings of U.S. bonds to support the yuan, explains Joseph Quinlan, chief market strategist at U.S. Trust, an arm of Bank of America Private Wealth Management.

"The Chinese government," Quinlan says, "doesn't want to see a disorderly yuan devaluation."

Wall Street closely watches Chinese holdings of U.S. bonds as China's sizable holdings and purchases of U.S. debt in recent years have been key reasons why interest rates in the USA have stayed near historic lows.

Mylan's generic EpiPen hits market after fury over dramatic price hikes

For now, Wall Street strategists don't see China's move to lighten up on U.S. Treasuries as a big risk to the U.S. bond market in terms of rising interest rates.

"I don't see a big impact on yields," Quinlan says. "Global demand for U.S. debt remains robust on solid growth prospects for the U.S. and negative interest rates around the world."

In Friday trading, the 10-year Treasury note yielded 2.6%, its highest level since late 2014. Long-term U.S. government bonds have been selling off as the Fed moves to a rate-tightening stance in 2017 after hiking short-term rates this week for the first time this year.

http://www.usatoday.com/story/money/markets/2016/12/16/japan-not-china-biggest-us-debt-holder/95512328

kcontents