China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus, with data showing they accounted for almost all of a record $40.8 billion of net foreign selling of Treasuries.
The sales were part of $66.9 billion of net sales by foreigners of long-term U.S. securities in June, a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed on Thursday.
China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to $1.0834 trillion. Combined, they accounted for about $40 billion in net Treasury outflows.
Comments from Federal Reserve Chairman Ben Bernanke on May 22 that the central bank could reduce its four-year asset buying or quantitative easing (QE) program by September fueled a sell-off in U.S. Treasuries.
"China's net selling of U.S. treasury could be a reaction to the possible QE exit," said a senior economist at the Chinese Academy of Social Sciences (CASS), a top government think-tank.
Speaking on condition of anonymity, he said China's currency reserves management had become much more pro-active.
"Holding too much U.S. debt is not wise at a time when Treasury yields rise and prices fall. On the other hand, the adjustment has been marginal considering China's massive holdings of U.S. debt, and China cannot dump U.S. debt, which could spook markets and upset the U.S. government," he said.
But Bank of Thailand Deputy Governor Pongpen Ruengvirayudh said the decision to reduce Treasury holdings was not a new one taken in light of the Fed's tapering expectations. "We have adjusted (our strategy on the U.S. Treasury in the foreign reserves) for a while," she told reporters.
BIGGEST SINCE 1977
U.S. 10-year yields jumped to a two-year high of 2.823 percent on Thursday after encouraging jobless claims data. The yields had hit a high of 2.6670 percent in June after trading in a range of 1.6140 to 2.2350 percent in May. In April, benchmark yields were trading below 2.0 percent.
"The sell-off in Treasuries and Bernanke's tapering remarks are related," said Michael Woolfolk, global market strategist at BNY Mellon in New York. "Lightning doesn't strike in the same place twice, but Bernanke repeated his comments in June and that roiled the market."
Woolfolk said the net Treasury outflow was the highest since at least 1977 when the government started compiling the data.
A Japanese policymaker however said the fears of Fed tapering weren't behind the sales. The market volatility caused by changing expectations around Fed policy might have forced some Asian central banks to intervene to defend their currencies, and in the process reduce their Treasury holdings, he said.
"I don't think Fed tapering expectations had much to do with the selling of U.S. Treasuries," the Japanese policymaker told Reuters.
June was the fifth straight month that foreign investors sold long-term U.S. securities, but the specific selling of long-term government bonds was the big turnaround as foreigners had bought $11.3 billion of Treasuries in May.
And more recent data from the Federal Reserve showed foreign central banks' holdings of U.S. securities fell $2.7 billion to $3.3 trillion in the week ended August 14.
Including short-dated assets such as bills, overseas investors sold a net $19 billion in assets in June, compared with inflows of $56.6 billion the previous month.
U.S. stocks were also out of favor. Foreigners pulled $26.841 billion out of equities in June after selling $8.62 billion in May. Foreigners also sold $5.2 billion in U.S. agency debt, after selling $10.3 billion in May.
(Reporting by Gertrude Chavez-Dreyfuss; Writing by Nachum Kaplan and Vidya Ranganathan; Editing by John Mair and Richard Borsuk)