Foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday.

China sold $34.2bn in US Treasury securities during the month, the US Treasury said on Tuesday, leaving Japan as the biggest holder of US government debt with $768.8bn. China overtook Japan as the largest holder in September 2008.

The shift in demand comes as countries retreat from the “flight to safety” strategy they embarked on upon during the worst of the global economic crisis and could mean the US will have to pay more to service its debt interest.

For China, the shedding of US debt marks a reversal that it signalled last year when it said it would begin to reduce some of its holdings. Any changes in its behaviour are politically sensitive because it is the biggest US trade partner and has helped to finance US deficits.

Alan Ruskin, a strategist at RBS Securities, said that China’s behaviour showed that it felt “saturated” with Treasury paper and that this is the sign of a trend. The change of sentiment could come at the detriment of the US dollar and the Treasury market as the US has to look to other countries for financing. Japan and the UK could pick up some of that slack and last month both added to their Treasury holdings. However, the overall monthly sell-off of $53bn was the biggest on record.

chart: US treasury securities
© Financial Times

The figures come as the White House grapples with how to cut the US deficit, which is projected to be $1,560bn in 2010, or 10.6 per cent of gross domestic product. However, the move away from the safety of US debt is a sign of growing confidence in the global economy.Net purchases of long-term US securities declined to $63.3bn from $126.4bn in November, according to Treasury figures. Foreigners increased their purchases of US equities, buying $20.1bn in December after buying $9.7bn the previous month.

However, Gregory Daco, economist at IHS Global Insight, said that global appetite for US assets remained relatively solid, and that the recent turmoil in European bond markets caused by the Greek debt crisis meant the US would remain attractive even as the dollar strengthened.

“A stronger US dollar should not deter foreign investments as long as real GDP [gross domestic product] and productivity growth remain strong,” he said.

Separately on Tuesday, the National Association of Homebuilders said that confidence among builders was on the rise this month thanks to signs of healing in the labour market. Its index of confidence ticked up two points to 17 in February, as low interest rates and the extended homebuyer tax credit improved conditions for buying.

“Builders are just beginning to see the anticipated effects of the home buyer tax credit on consumer demand,” said David Crowe, NAHB’s chief economist. “Meanwhile, another source of encouragement is the improving employment market, which is key to any sustainable economic or housing recovery.”

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