China bought most Treasurys in six months in February

  • China increased its Treasury holdings by $8.5 billion in February, the most in six months.
  • As trade tensions rise between the U.S. and China, speculation has grown that China could reduce Treasury purchases or even sell Treasurys.
  • China's February Treasury purchases were made in the month before U.S. trade actions against China were announced.
Chinese President Xi Jinping and U.S. President Donald Trump attend a welcoming ceremony November 9, 2017 in Beijing, China.
Getty Images
Chinese President Xi Jinping and U.S. President Donald Trump attend a welcoming ceremony November 9, 2017 in Beijing, China.

China increased its Treasury holdings in February by $8.5 billion, its biggest purchase in six months, but Japan's holdings declined.

China's Treasury holdings rose to just under $1.18 trillion, according to the Treasury. Foreign net buying of Treasurys was $43.2 billion for the month.

As trade tensions between the U.S. and China increase, so has speculation that the Chinese could cut back purchases of Treasurys or could even be a seller.

"It's the biggest increase in six months, but it's only an $8.5 billion increase. I don't think it really amounts to much. They're still below where they were in December. Last month, there was a pretty big drop," said Tom Simons, money market economist at Jefferies.

In December, China's holdings of Treasurys were at $1.18 trillion before dropping to $1.17 trillion in January.

China is the largest holder of U.S. Treasurys, followed by Japan, which saw its holdings fall by $6.3 billion, to a total of $1.06 trillion.

"My personal opinion is there's no real viable option for them to discontinue their purchases," said Simons. "Maybe they slow down a little bit ... Unless they want to maintain their currency peg against a different currency, they're going to have to buy dollars."

Foreign buyers also bought $11.8 billion in agency debt and $4.1 billion of corporate debt. They reduced equities by $1.2 billion.

The Trump administration on March 1 announced tariffs on aluminum and steel, which affect China. The U.S. also announced its intention to put tariffs on $50 billion in Chinese goods, and Trump has since threatened to add tariffs to another $100 billion of goods.

"If you look at where the yields are and where the value is, the Chinese are going to go to where there is tremendous liquidity," said Andrew Brenner of National Alliance. He said the U.S. 2-year is much more attractive, based on its 2.37 percent yield, than other sovereigns. The German 2-year, for instance, still has a negative yield. "What's the alternative?"

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