Bonds

Who'll be the US' biggest creditor?

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Japan has overtaken China to become the leading holder of U.S. Treasurys thanks to a flood of money coming out of its massive state pension fund -- and it looks as though it will be America's biggest creditor for some time to come, analysts say.

In February, Japan's holdings of U.S. Treasurys, at 1.224 trillion dollars, inched above the 1.223 trillion dollars held by mainland China, beating its rival for the first time in six-and-a-half years, according to the latest data from Treasury International Capital.

While capital inflows into China have slowed, a wall of money is flowing out of Japan following the change in the asset allocation policy of the world's largest state pension fund, the Government Pension Investment Fund of Japan (GPIF).

And that money is headed to the U.S., analysts said.

"Yields have been falling in the euro zone and speculation that the U.S. will be the only developed country to hike interest rates is accelerating the flow of Japanese money to the U.S.," Nomura market economist Shuichi Obata told CNBC by phone.

Waves and waves

And there is more Japanese money headed to the U.S.

The GPIF is still only half way through reallocating its assets of 137 trillion yen ($1.15 trillion) in an effort to lift returns. At the end of October 2014, the state pension fund announced it would increase its holding of foreign bonds from 11 percent to 15 percent.

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But while the flow out of the GPIF is expected to slow later into this year as the state pension fund firms up its new portfolio allocation, other Japanese investors will continue to chase higher yields in the U.S., according to Nomura's Obata.

"The yield differential is just too wide to ignore," he said.

The yield on 10-year Japanese government bonds was at 0.329 percent at the end of Asia trading on Thursday. The yield on the 10-year U.S. Treasury's was seen at 1.893 percent, while the 10-year benchmark euro zone bond, the German bund, fell to a record low of 0.090 percent in early Europe trading.

Meanwhile, Chinese authorities have calmed recent speculation that the yuan would be depreciated, ANZ senior FX strategist Khoon Goh told CNBC by phone.

That has stabilized the pace of capital outflows, and with inflows slowing too, the People's Bank of China is no longer accumulating piles of foreign currency reserves and China is likely to stop buying any more U.S. Treasurys, he said.

"Japan will be the top buyer of U.S. Treasurys for the foreseeable future because China's foreign reserves are not building up and the country does not need to place excess foreign currency reserves in U.S. Treasury's," Goh told CNBC.