Japan closes on China in US bond holdings

Japan closed in on China as the largest holder of US government debt during August as foreign demand for Treasury securities remained robust.

China added $4.3bn in Treasuries in August to take its holdings to $1.153tn, while Japan bought $5.3bn, for a total of $1.121tn.

Over the past year, Japan’s pace of buying has accelerated with its Treasury holdings rising from $907bn, while China’s overall portfolio has dropped from $1.278tn according to US Treasury data.

The convergence between the two major buyers of Treasury debt comes during a closely fought US presidential election, with Mitt Romney, the Republican candidate seeking to cut spending in order to reduce US reliance on borrowing from China. Mr Romney has also promised to name China a currency manipulator on his first day in office.

“Simply, we’re not just borrowing from the Chinese, we’re borrowing from the Japanese as well,” said Dan Greenhaus, chief global strategist at BTIG. “It’s important to remember that Japan lends the US every bit as much money as does China.”

China supplanted Japan as the largest foreign holder of Treasuries in September 2008 during the financial crisis, and peaked in July 2011 at $1.314tn. China’s need to recycle foreign exchange reserves into US debt has eased as its economy has slowed.

While Japan is close to officially overtaking China based on the monthly Treasury data, in the past China’s purchases of bonds have taken place through other financial centres such as London. When the Treasury revises its data annually, UK purchases often decline sharply and countries such as China are shown to have higher holdings.

The monthly Treasury International Capital Data released on Tuesday revealed $90bn in net foreign purchases of long-term US securities. In a month when the 10-year yield rose to as much as 1.86 per cent from 1.50 per cent, Treasury buying amounted to $42.9bn, down from $49bn in July.

Demand from Caribbean banking centres, a proxy for hedge funds, was solid, $11.2bn higher at $256.9bn, while UK holdings rose $13.2bn to $153.6bn. Swiss holdings also continued to rise, up $12.1bn to $202.1bn, reflecting efforts to peg its currency.

Ahead of the Federal Reserve launching a third round of quantitative easing in September, demand for US mortgages, up $18.6bn, and corporate bonds, up $10.8bn, was also robust.

“In sum, total fixed income flows were extremely strong in August, with foreign accounts buying $72.4bn in US fixed income securities, reflecting the strongest monthly pace of purchases since January,” said TD Securities.

“Aside from positioning for the QE3 announcement, the strong purchase data is consistent with strong ongoing demand for safe-haven assets despite some recent improvement in the European situation,” added the bank.

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