The Treasury International Capital System (TICS) report was released last week and showed that Japan had surpassed China (not including Hong Kong) as the largest foreign holder of U.S. Treasuries. Although the headline sounds ominous, this move isn’t without historical precedent. From the beginning of TICS data in 2000, Japan was consistently the largest holder of U.S. Treasuries until it was surpassed by China in 2008. Outside of a blip in February 2015, China has held the title since.
The headline is interesting, but what does it mean for the Treasury market? As yields spiked post-U.S. election, we discussed our view that China’s selling of Treasury bonds could be part of the reason that yields were moving higher, given that China’s currency was falling relative to the U.S. dollar, possibly leading China to sell foreign reserves to prevent a further devaluation (as discussed here). The trend has continued since then, making the move to second place for China less surprising.
TICS data are important to watch, but unfortunately not very timely as the report is lagged by two months. The Federal Reserve (Fed) releases more timely, but less comprehensive, data on a weekly basis that shows foreign Treasury holdings held in custody by the Fed. Though these data do not say who the holders are, it is interesting to note that holdings have increased by nearly $45 billion from the November 2, 2016, low through December 14. As yields increased post election in the United States, we have noted that the 10-year Treasury’s yield advantage to the 10-year German bund is near a 25-year high, and the advantage to Japanese government bonds (JGB) was also looking more attractive. The small increase in custodied Treasuries may show that the increasing relative attractiveness of Treasury yields had been fueling additional foreign demand.
The Fed will release its latest weekly numbers later today, and it will be interesting to see if U.S. dollar strength following last week’s interest rate hike led to lower levels of custodied assets (which may indicate that China sold more than other countries bought) or whether the yield advantage of Treasuries was able to overcome this headwind and lead to net foreign purchases.
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