The fears and warnings, even mentioned in the house, regarding the dire situation that will befall interest rate markets when China starts to sell US Treasuries appears to be a non-event. Recent numbers show that China Inc. has so far this year reduced their Treasury holdings by around $200 billion, the first time they have reduced exposure since 2001, with very little impact on market rates.
The reason for this is that domestic players in the US are buying up all available bonds at a very swift rate and increasing their government debt holdings for the first time since 2012. Since 2008, foreign investors have virtually doubled their holdings of Treasuries now holding around $6.1 trillion of the $12.9 trillion of outstanding bonds with China the largest holder, with a book of around $1.4 trillion. This buying has kept interest rates across the curve much lower than otherwise would have been over the period and has therefore saved the American treasury billions of dollars in finance costs.
So far this year American funds have taken down 42% of the $1.6n trillion of notes and bonds sold at auction, the highest since the Treasury produced data five years ago. By way of a comparison, in 2011 domestics accounted for just 18% of purchases at auctions. US investors now hold $4.3 trillion in US government debt, 33.1%, the highest exposure since 2012 easily offsetting Chinese selling. Interestingly, to better understand China’s activity you need to take into account flows from Belgium which analysts have established is the home for Chinese custodial accounts.
As we know the American economy has done well in creating jobs in this current expansion, but disappointing indicators from retail sales, manufacturing and wages has encouraged US investors into bonds at a time when the Fed is widely expected to raise rates. The reason for this is inflation, or lack thereof. Since the last recession ended in 2009 average hourly earnings have increased less than any expansion since the 1960s, and could be why US auction data suggests US funds favoured 30 year bonds over the last period, those offering the most yield but also the most vulnerable to rising inflation expectations.