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Monday, August 15, 2011

China Still Buying Treasuries, Demand Had Waned Elsewhere

The WSJ details:

Private foreign investors sold a record amount of U.S. Treasurys in June as the U.S. debt-ceiling debate intensified.
While it may be easy to blame selling on the debt ceiling issue, that really wasn't an issue until July. The broader selling likely occurred due to issues that were unrelated to the debt ceiling (supply of debt coming to market, the end of the QEII program, expectations for decent global growth).

That said, the scale of the actual selling is interesting (back to the WSJ).
Private foreign net purchases of long-term Treasury bonds and notes fell by $18.3 billion in June, following a $16.4 billion increase in May, according to the monthly Treasury International Capital report, known as TIC. The previous record drop was set in June 2000, when private foreign investors sold $16.5 billion in Treasuries.
Sales were concentrated in the Caribbean (i.e. insurers / private wealth). The way I would interpret this is that these investors sold Treasuries UNTIL the debt ceiling issue, which combined with concerns over Europe caused the flight back into Treasuries (i.e. if there was no debt ceiling issues, there would have been less demand in July / August).

Immune to this whipsaw was China.
China's holdings actually rose in June, by $5.7 billion to $1.166 trillion, following net buying of $7.3 billion in May. Analysts caution the data may not reflect the full spectrum of China's activity in the market, however. The Treasury recently adjusted its estimate of China's holdings based on use of proxies in other countries.
The below shows the combined purchases by China (direct) and the UK (where China purchases indirectly).



Until something drastically changes, expect a continued rise in the above chart regardless of net purchases / sales from other foreign entities.

Source: Treasury