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Conclusion: The Chinese say U.S. Treasuries are important and a long term holding, but they are consistent net sellers.  This will be negative for the price of Treasuries if the trend is sustained.

In May, total foreign holding of U.S. Treasury debt increased slightly by $5.8 billion to $3.96 trillion.  The most noteworthy change was in Chinese holdings of Treasury debt.  In May, China’s holdings fell by $32.5 billion to $867.7 billion, which was a 3.6% drop month-over-month.  Japan, the second largest holders of U.S. treasuries, also dropped their exposure month-over-month.

Interestingly, since August 2009, foreign holdings of U.S. Treasuries have increased from $3.5 trillion to $3.9 trillion, which is growth of 11.4%.  In the same period, Chinese holdings of U.S. Treasuries have declined from $936.5 billion to $867.7 billion, or 7.7%.

It is always interesting what the Chinese say.

On March 13, 2009, Chinese Premier Wen Jiabao said: “We lent such a huge fund (sic) to the United States and of course we’re concerned about the security of our assets and, to speak truthfully, I am a little bit worried.”

And more recently the Chinese statement on the State Administration of Foreign Exchange website stated: “US bonds constitute “a very important market for China” and “any increase or decrease in our holdings of US Treasuries is a normal investment operation”.

So, recently the Chinese have been both defending Treasuries, and selling them. 

As Keith noted in the Early Look today:

“This morning, on the heels of a very disappointing earnings report out of one of America’s largest growth engines (Google), yields on 2-year US Treasuries are trading down to 0.58%. The inverse of this yield equates to the highest prices for short term US Treasury Debt EVER.

Ever, as we like to say at Hedgeye, is a very long time. Particularly when considering bubbles and the tail risks they incubate, it’s critical to never accept ever as forever.”

The fact is, short term Treasuries are priced to perfection.  As such, any incremental change in demand, will have a meaningful impact on price and yield.

So, as you think about the next move in Treasuries and what the largest holder is doing, watch what China does and not what they say.  The chart below outlines what they’ve been doing.  And the trend is negative for the price of Treasuries.

Daryl G. Jones

Managing Director

Watch What They Do, Not What They Say . . . The Chinese Are Selling Treasuries - 1