China, who is the largest foreign owner of US debt, sold off its Treasury holdings at the fastest pace in about two years during March, bringing total holdings down to $1.12 trillion.
In the 12-month period ended in March, the latest month for which data is available, China’s stockpile of US government notes, bonds and bills fell by $67.2 billion, a 5.6% decline. The total has fallen by some $200 billion since the peak in 2012 and now represents 7% of total US debt outstanding, while previously it was 12%, according to UBS.
The move represents a continued pattern of declines as the two sides have been unable to forge a long-term trade agreement and remain engaged in a tough tariff fight that has escalated in recent days.
The threat of the country either not buying Treasuries or engaging in outright sales has shaken the bond market before. However, in addition to any punitive action China might take, the sellout is believed to be an effort to defend China’s own currency. The aggressive reduction of holdings could aggravate ongoing trade negotiations between the world’s two largest economies, yet the long-term impact of such moves remains unclear.
UBS estimates that if the reduction is gradual, it likely would result in a rise in the benchmark 10-year Treasury yield of at most 0.4 percentage point.
“To the extent that China’s Treasury sales could be either the cause or the effect of a more risk-averse global environment, the positive impact on Treasury yields could be smaller than estimated if private investors step up their Treasury purchases,” UBS strategist Chirag Mirani and others said in a note to clients.
China remains the world’s biggest holder of total US debt, even after its share declined to 17.3% compared with other governments around the globe, the lowest since June 2006. Japan is still the second-largest holder, with $1.08 trillion, while the UK stepped backed into third place as it increased its level to $317.1 billion.
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Foreign government ownership of US debt hit a record of $6.47 trillion, up 4% from a year ago, as the government’s total debt continues to swell and now has topped $22 trillion. Foreign residents increased their holdings by $23.9 billion.