Cold War 21: China Passes Japan as Biggest U.S. Treasuries Holder

Nov. 18 (Bloomberg) -- China surpassed Japan in September to become the biggest foreign holder of U.S. Treasuries, as foreign investors sought the relative safety of government debt as stocks plunged 9.1 percent that month.

Total net purchases of long-term equities, notes and bonds increased a net $66.2 billion in September from $21 billion the previous month, the Treasury said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $143.4 billion, compared with net buying of $21.4 billion the month before.

China led all foreign official investors in September by posting a net increase in U.S. Treasuries for the sixth month in the past seven, bringing its total ownership close to $600 billion. Japan was a net seller of Treasuries for the fourth month in the past six.

“The details of the report paint a much more positive picture of cross-border investments than expected,” said Michael Woolfolk, a senior currency strategist at Bank of New York Mellon Corp. “China, along with others, is showing more demand than anticipated for U.S. assets.”

Economists predicted international investors would buy a net $27.2 billion of long-term securities in September, based on the median of seven estimates in a Bloomberg News survey.

China leapfrogged Japan, increasing its Treasury holdings by $43.6 billion to $585 billion, the report said. Japan, now the second-largest foreign owner of U.S. government debt, reduced its holdings by $12.8 billion to $573.2 billion.

China Demand

China’s ownership of U.S. government debt has doubled since July 2005, while Japan’s holdings are down from a peak of $699 billion in August 2004.

Foreign demand for Fannie Mae, Freddie Mac and other U.S. agency debt increased from a month earlier. Purchases of long- term agency debt totaled a net $6.2 billion, compared with net sales of $8.7 billion in August.

The Treasury’s figures include both agency debt and mortgage-backed securities and aren’t restricted to Fannie Mae and Freddie Mac bonds. Mortgage-backed securities of Ginnie Mae and corporate debt of the Federal Home Loan Bank System are also included in the report.

Stocks plunged and Treasuries rose in September as Treasury Secretary Henry Paulson negotiated for two weeks with Congress over a $700 billion plan to address the worst financial crisis in 70 years.

Stocks, Corporate Bonds

International purchases of U.S. stocks totaled a net $11.5 billion, compared with net sales of $982 million in August. Foreigners sold a net $7.6 billion of corporate bonds, compared with net sales of $13.1 billion a month earlier.

Net purchases of Treasury notes and bonds increased to a net $88.9 billion, compared with $30.6 billion a month earlier. Net foreign official buying of Treasury bonds and notes totaled a net $4.9 billion, after net purchases of $4.8 billion the previous month.

The Treasury’s reporting on long-term securities captures international purchases of government notes and bonds, stocks, corporate debt and securities issued by U.S. agencies such as Fannie Mae and Freddie Mac, which buy mortgages.

The dollar rose 1.9 percent in September after a 4.5 gain the previous month, according to a trade-weighted index of major currencies. The Standard & Poor’s 500 Index in September had its worst month since 2002, falling for the fourth time in five months.

U.S. Treasuries

The yield on the benchmark 10-year note averaged 3.68 percent, compared with 3.88 percent in August. Treasuries returned 1.8 percent in September, the most since a 2.5 percent gain in January, according to Merrill Lynch & Co.’s U.S. Treasury Master index.

The U.K., which through London acts as a transit point for international investors, especially those in the Middle East, bought $30.3 billion of Treasuries, bringing holdings to $338.4 billion.

Some economists say the difference between the trade gap and securities purchased by foreigners is an indicator of how easily the U.S. can finance its external obligations.

The U.S. trade deficit shrank in September by 4.4 percent to $56.5 billion, the smallest in almost a year. The gap narrowed as a weakening economy restricted demand for foreign goods such as automobiles and televisions. (source)