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China ramps up Treasury purchases to record high

Wednesday, 17 Jul 2013 | 2:24 AM ET
U.S. Treasury Building
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U.S. Treasury Building

China's holdings of U.S. Treasurys climbed to a record high in May despite a broad selloff in the country's government debt.

China, the biggest foreign holder of U.S. sovereign bonds, raised its holdings of government debt by $25.2 billion to $1.316 trillion, according to the U.S. Treasury Department international capital (TIC) data published late Tuesday.

(Read More: Fmr Treasury Official: Higher Rates Will Hurt Markets)

Japan, the second largest holder, meantime, lowered its holdings by $1.7 billion to $1.11 trillion.

Overall, foreign investors sold long-dated U.S. securities for the fourth consecutive month in May, dumping $27.2 billion worth of the securities in the month, compared with $21.8 billion in April.

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Treasury yields have risen more than 50 percent in the last 3 months. Jeff Rosenberg, Blackrock, shares where he sees rates going.

U.S. sovereign debt has suffered a steep selloff since the beginning of May on jitters surrounding the Federal Reserve's plans to scale back its bond buying program. The 10-year bond yields, which move in the opposite direction to prices, have risen from 1.7 percent at the start of May to as high as 2.74 percent in early July.

"Chinese reserves are growing and they have to put it somewhere - there's a lot of confidence that the U.S. is doing a better job at mending its economy and its fiscal balance sheet is far stronger," said Nizam Idris, head of Strategy, Fixed Income & Currencies at Macquarie, explaining the demand by China for U.S. debt.

(Read More: Goldman Sachs: Treasury Yields Will Hit 4%)

China's foreign exchange reserves - the world's largest - rose to $3.5 trillion at the end of the second quarter from $3.44 trillion at the end of the first quarter. The country has accumulated high levels of foreign exchange reserves as a result of its large trade surpluses.

The country's trade surplus widened to S27.75 billion from $20.43 billion in May, for example.

"Central banks aren't like Pimco, their objective is not to maximize profit, it's for security and liquidity. Therefore, Treasury papers still look like attractive for 'buy and hold' investors like central banks," Idris said.

Analysts expect the China's Treasury holdings to continue to rise further in the foreseeable future given the country's lack of feasible alternatives to park their huge foreign reserves and growing current account surplus.

—By CNBC's Ansuya Harjani

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