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China increased its purchases of U.S. Treasuries for the first time in six months in March as concerns about European debt contagion sparked an influx of foreign investments into dollar-denominated securities.
China's holdings of U.S. Treasury securities rose by 2% to $895.2 billion, the first increase since last September, as the Asian juggernaut cemented its position as the top holder of U.S. government debt, according to the monthly Treasury International Capital report, known as TIC. The boost follows net sales of $11.5 billion in February.
Japan, the second largest holder of Treasuries, also was a net buyer in March, lifting its portfolio holdings to $784.9 billion, from $768.5 billion in February.
China's purchases were reflective of a deluge of foreign investment in U.S. debt securities as concerns about a European debt contagion and a rebounding U.S. economy sparked greater interest in purchasing U.S. corporate debt.
The government reported that net holdings of long-term securities, which includes the debt of U.S. companies as well as government debt, rose $140.5 billion in March, the largest one-month gain on record. It surpassed the old record of a net increase of $135.8 billion in May 2007.
Net Treasury purchases by all foreign investors jumped by $108.47 billion in March from $48.1 billion in February. Total foreign holdings of Treasury securities rose 3.5% to $3.88 trillion.
"This is a vote of confidence, of course, and we're impressed with the breadth of buying and the 'quality' of those buyers — UK, Japan, China, OPEC, Canada, Germany," David Ader, head of government bond strategy at CRT Capital Group, Stamford, Connecticut told Reuters.
Investors were big sellers of Greek bonds throughout March, and worries that Spain, Portugal and other European Union (EU) countries would be unable to repay their debt has put bond investors on edge.
Last week, EU members along with the International Monetary Fund (IMF) put together a nearly $1 trillion support package to convince investors that their bond holdings are safe, but they released few details about how the aid package would be applied.
"The Europeans have been panicking and buying the U.S.," Sebastien Galy, currency strategist at BNP Paribas SA (OTC ADR: BNPQY) told The Wall Street Journal. "It's definitely a flight to quality."
Strong demand for U.S. Treasury auctions suggests that inflows in upcoming TIC data will be "much bigger," he said.
Net foreign purchases of U.S. corporate debt jumped to $16 billion from a net outflow of $12 billion in February, and net purchases of U.S. agency debt rose sharply to $21.9 billion from $2.4 billion.
"Long-term purchases exceeded our best expectations and clearly show foreign investors have not satiated their appetite for U.S. securities," Michael Woolfolk, senior currency strategist at BNY Mellon Corp. (NYSE: BK) in New York told Reuters.
The latest influx of foreign investment could ease concerns that lagging overseas demand will force the U.S. government to pay higher interest rates to finance its burgeoning debt.
An apparent sell-off of Treasuries by China at the end of last year caused concern that it was shifting out of U.S. assets. But the government later released reports with major upward revisions to the December data, showing that China hadn't actually lost its position as the top Treasury holder.
China's net Treasury purchases may be "the first tentative signs that maybe they really are hostage to the U.S. dollar and are really struggling to find an alternative to the dollar," Alan Ruskin, chief international strategist at RBS Securities in Stamford, Connecticut told Reuters.
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Debt Contagion Category