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Japan Closes on China in US Bond Holdings

Japan closed in on China as the largest holder of US government debt during August as foreign demand for Treasury securities remained robust.

Peter Gridley | Taxi | Getty Images

China added $4.3 billion in Treasuries in August to take its holdings to $1.153 trillion, while Japan bought $5.3 billion, for a total of $1.121 trillion.

Over the past year, Japan's pace of buying has accelerated with its Treasury holdings rising from $907 billion, while China's overall portfolio has dropped from $1.278 trillion according to US Treasury data.

The convergence between the two major buyers of Treasury debt comes during a closely fought US presidential election, with Mitt Romney, the Republican candidate seeking to cut spending in order to reduce US reliance on borrowing from China. Mr. Romney has also promised to name China a currency manipulator on his first day in office.

"Simply, we're not just borrowing from the Chinese, we're borrowing from the Japanese as well," said Dan Greenhaus, chief global strategist at BTIG. "It's important to remember that Japan lends the US every bit as much money as does China."

China supplanted Japan as the largest foreign holder of Treasuries in September 2008 during the financial crisis, and peaked in July 2011 at $1.314 trillion. China's need to recycle foreign exchange reserves into US debt has eased as its economy has slowed.

While Japan is close to officially overtaking China based on the monthly Treasury data, in the past China's purchases of bonds have taken place through other financial centers such as London. When the Treasury revises its data annually, UK purchases often decline sharply and countries such as China are shown to have higher holdings.

The monthly Treasury International Capital Data released on Tuesday revealed $90 billion in net foreign purchases of long-term US securities. In a month when the 10-year yield rose to as much as 1.86 percent from 1.50 percent, Treasury buying amounted to $42.9 billion, down from $49 billion in July.

Demand from Caribbean banking centers, a proxy for hedge funds, was solid, $11.2 billion higher at $256.9 billion, while UK holdings rose $13.2 billion to $153.6 billion. Swiss holdings also continued to rise, up $12.1 billion to $202.1 billion, reflecting efforts to peg its currency.

Ahead of the Federal Reserve launching a third round of quantitative easing in September, demand for US mortgages, up $18.6 billion, and corporate bonds, up $10.8 billion, was also robust.

"In sum, total fixed income flows were extremely strong in August, with foreign accounts buying $72.4 billion in US fixed income securities, reflecting the strongest monthly pace of purchases since January," said TD Securities.

"Aside from positioning for the QE3 announcement, the strong purchase data is consistent with strong ongoing demand for safe-haven assets despite some recent improvement in the European situation," added the bank.