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UPDATE 2-Japan tops China as world's largest holder of U.S. Treasuries -data
December 15, 2016 / 10:25 PM / a year ago

UPDATE 2-Japan tops China as world's largest holder of U.S. Treasuries -data

* China’s Treasury holdings decline for 5 straight months

* China has been using reserves to support yuan

* Foreigners sell U.S. Treasuries for 7 consecutive months (Recasts with pace of overall foreign sales of Treasuries)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 15 (Reuters) - Foreigners dumped U.S. Treasuries for a seventh straight month in October, and Japan moved past China to become the largest non-U.S. holder of American government debt for the first time in nearly two years, U.S. Treasury Department data showed on Thursday.

China led a broad-based selloff in Treasuries in October, during which nine of the 10 largest of America’s foreign creditor nations pared back their holdings. Only Ireland - the No. 3 holder of Treasuries - increased its stake, and then only by about $26 million.

Japan, which shed around $4.5 billion of U.S. paper, ended the month with $1.131 trillion in U.S. Treasuries, while China’s holdings plunged to $1.115 trillion from around $1.157 trillion in September. The last time Japan held the largest stockpile of Treasuries was in February 2015, when it had $1.224 trillion.

October’s drop of $41.3 billion by China was the largest since December 2013 and the third-largest monthly reduction ever of the country’s holdings of U.S. debt.

“China has been needing liquidity, and that’s one of the sources of them getting it, with a lot of moving parts such as the value of their currency,” said Lou Brien, market strategist, at DRW Trading in Chicago.

China’s Treasury holdings for October were the smallest since July 2010, declining for five straight months, data showed.

China has been dipping into its reserves, selling Treasuries to support the yuan. The yuan fell to its weakest level against the U.S. dollar in more than eight years on Thursday, after the Federal Reserve raised interest rates and indicated that it expects three more rate increases next year.

In the year through October, China had slashed its Treasuries holdings by $130.4 billion, or nearly 10.5 percent.

October’s data preceded U.S. President-elect Donald Trump’s decision to accept a telephone call from Taiwan’s president, Tsai Ing-Wen, on Dec. 2, the first such contact since 1979 and the U.S. adoption of its “one China” policy. The issue is highly sensitive for China, which considers Taiwan a renegade province.

In the meantime, Japan’s holdings have remained fairly steady, allowing the yen to weaken against a surging dollar, analysts said.

China overtook Japan as the largest U.S. debt holder in September 2008 as the financial crisis was going into high gear. At its peak in November 2013, it had amassed nearly $1.32 trillion of Treasuries but now holds some $200 billion less.

FOREIGN FLIGHT

Foreigners have been persistent sellers of Treasury notes and bonds for more than year, and have reduced their holdings in nine of the past 12 months. The month’s outflows totaled $63.54 billion and came on the heels record foreign selling of $76.59 billion in September.

In fact, foreigners are dumping U.S. debt at a record pace, with some $304 billion sold off over the last seven months. Among top 10 holders, only Ireland added to its stake of Treasuries, lifting it to a record $270.95 billion.

Foreign official institutions such as central banks sold $45.26 billion in October, with private investors selling $19.17 billion.

Samarjit Shankar, global markets strategist, at BNY Mellon, noted that its custody data also showed net outflows since June, suggesting investors had sold U.S. debt given the significant overweight positions built up for years.

As a result of the selling, Treasury yields have risen. Yields on benchmark U.S. 10-year notes at the beginning of October were 1.6240 percent, hitting a high of 1.8790 percent and ending the month at 1.8340 percent. Late on Thursday, 10-year yields were at 2.598 percent.

Data also showed foreigners bought $9.4 billion in long-term U.S assets in October, after selling $64.8 billion the previous month. Including shorter-dated securities, overseas investors purchased $18.8 billion in October, after selling a massive $154.4 billion in September. (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Dan Burns in New York and Kevin Yao in Beijing; Editing by Jonathan Oatis and Alan Crosby)

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