Key Development: China Advise Financial Institutions to Reduce US Bond Holdings
Chinese regulators have reportedly advised the nation's financial institutions to reduce their holdings of US government bonds. This guidance stems from concerns over market volatility.
Market Reaction
Following the news, yields on 10-year Treasuries increased by up to four basis points to 4.25%, later paring the rise to two basis points. The rate on 30-year Treasuries rose three basis points to 4.88%. The Bloomberg Dollar Spot Index experienced a 0.3% decline.
Regulatory Directive
Sources familiar with the matter indicate that Chinese officials urged banks to limit new purchases of US government bonds and instructed those with high exposure to decrease their current positions.
The directive did not specify targets for size or timing and does not apply to China's official state holdings of Treasuries. The rationale provided was risk diversification.
Broader Context and Global Trend
This move aligns with a broader trend of countries like India and Brazil reducing their exposure to the US bond market, citing doubts about the attractiveness of US assets. Geopolitical factors are also noted as contributing to this sentiment and driving interest in alternative assets like gold.
Gareth Berry, a strategist at Macquarie Group Ltd., characterized this as further evidence of a pattern suggesting long-term structural outflows from the dollar.
Expert Commentary: Limited Immediate Impact
Kathleen Brooks, research director at XTB, observed that the initial market reaction, in terms of selling, has been limited. She indicated that a large-scale, abrupt sell-off of Treasuries by China would significantly disrupt the global economy by causing US and global yields to surge. The bond market appears to anticipate that any reduction in China's Treasury holdings would occur gradually, thus contributing to the current stability in yields.
Historical Holdings: A Decades-Long Decline
Official US data indicates that China-based investors' holdings of Treasuries have decreased to $682.6 billion, the lowest since 2008, from a 2013 peak of $1.32 trillion. However, Belgium's Treasury ownership, which often includes Chinese custodial accounts, has quadrupled to $481 billion since the end of 2017. When combined with holdings of US agency bonds and equities, China's total investment in American securities has remained relatively stable since late 2023. China ranks as the third-largest foreign holder of Treasuries, behind Japan and the UK.