October 16, 2018 / 10:01 PM / in a month

China Treasury holdings in August fall to lowest since June 2017: Treasury data

NEW YORK (Reuters) - China’s holdings of U.S. Treasuries fell for a third straight month in August to their lowest in more than a year, Treasury Department data showed on Tuesday, in what was likely a move to support its currency in the face of emerging market volatility.

Data showed that China’s Treasuries’ holdings fell to $1.165 trillion in August, from $1.171 trillion in July. The world’s second-largest economy, though, remains the largest non-U.S. holder of Treasuries.

“This was probably just to support China’s currency and just to handle day-to-day flows,” said Jon Hill, interest rates strategist at BMO Capital Markets in New York.

“August also coincided with emerging market volatility as well as some slight depreciation in the renminbi in the middle of August,” he added.

In August, the U.S.-China tariff war escalated, and the concern was that China would retaliate by cutting its vast holdings of Treasuries.

But BMO’s Hill said there has been no evidence of that based on the August report.

“It certainly doesn’t appear that China is weaponizing its Treasury holdings just given the small decline and the general lack of market reverberations,” Hill added.

Japan’s holdings of Treasuries also dropped in August, to $1.029 trillion, the lowest since October 2011. In July, Japan’s holdings were at $1.035 trillion.

Japanese investors sold U.S. and German bonds and bought British debt in August, data from Japan’s Ministry of Finance showed last week, though they may have become net buyers of U.S. debt in October. The investors turned net sellers of U.S. bonds and disposed a net 626.5 billion yen ($5.54 billion) worth of debt in August, the data showed.

Data also showed foreigners bought more than three times as much in U.S. Treasuries in August than in July, posting the largest inflow since June 2015.

Purchases of U.S. Treasuries totaled $63.13 billion in August, up from $18.94 billion the previous month. Treasury inflows were led by private investors, who bought $55.57 billion.

Analysts said this reflects high yields on Treasuries compared with fixed-income securities of other major economies.

Benchmark 10-year yields started August with a yield of 3.0 percent and ended down at 2.85 percent.

The report also showed foreigners bought net long-term U.S. securities for a second straight month in August to the tune of $131.8 billion.

Reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler and Richard Chang

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