China is to reverse course on its policy of selling US government bonds as the debt becomes more attractive and the yuan strengthens.
Government officials in China are positioning the central bank to make further purchases of US debt this year after the country bought $31.6 billion in March, the most since 2014.
Yields on benchmark ten-year treasuries fell by nearly 2 per cent to 2.13 per cent yesterday, their lowest level this year.
China increased its holding of US debt in February and March, having sold in all but one of the preceding eight months. These purchases continued after March, Bloomberg reported. The world’s second largest economy now holds about $1.1 trillion of US debt, making its holding second only to Japan. China began selling US debt in early 2014 and last year reduced its holding of US government bonds, notes and bills by $320 billion.
China and other countries regained their appetite for US debt this year after yields climbed and the American economy stabilised. In the first quarter, Russia boosted its holding of US treasuries by $13.7 billion, Saudi Arabia by $11.6 billion, South Korea by $4.2 billion and Singapore by $2.5 billion.
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Yields on ten-year treasuries fell to less than 1.36 per cent before the presidential election on November 8 last year. They climbed above 2.35 per cent within ten days of the election amid a sharp sell-off in government debt and went on to peak at about 2.6 per cent in mid-December.
Since then yields have fallen as the economy has stabilised and the Federal Reserve has raised interest rates twice. The central bank is expected to raise rates again next week, with the probability put at 91.2 per cent yesterday by CME Group’s Fedwatch tool.
As the yuan fell by more than 6 per cent against the dollar last year, China offloaded more US government bonds than in any year since data on its holdings were made available in 2000. The yuan has gained more than 2 per cent against the dollar this year.