* U.S. net long-term outflow highest since August 2007
* China, Japan sell net $40 bln Treasuries in June
By Kevin Yao and Viparat Jantraprap
Aug 16 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,
"I don't think Fed tapering expectations had much to do with
the selling of U.S. Treasuries," the Japanese policymaker told
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 Aug. 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 favour. 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.