Foreign Holdings of U.S. Treasuries Increase In January, But Net Sales by Foreign Official Institutions Fall
Gold and silver investors are wise to keep an eye on foreign treasury holdings. According to the Treasury International Capital (TIC) Data released yesterday by the U.S. Treasury Department, China’s U.S. Treasury Reserves fell by $8.2 billion while Belgium’s rose by $15.8 billion and Japan’s by $0.9 billion in January 2016.
The Treasury Department’s press release indicated that “The sum total in January of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a monthly net TIC inflow of $118.4 billion” and that net sales by foreign official institutions were $56.3 billion.”
Analysts suggest that the sale of U.S. Treasury Securities by foreign sovereigns reflects prudent reserve management (selling) that supports their currencies. The largest foreign holder of U.S. Treasury Securities, China, reduced its holdings by $8.2 billion in January.*
China and Japan remain the largest foreign holders of Treasury Securities. China held $1237.9 billion in U.S. Treasuries at the end of January 2015 and Japan held $1123.5.
The chart below shows the U.S. Treasury Securities holdings of the top ten foreign countries/entities as of January 2016 vs. their holdings as of January 2015. Of the entities listed in the top ten only Japan has significantly reduced its holdings – from $1,238.6 in January 2015 to $1123.5 in January 2016. Belgium which acts as a proxy for other foreign sovereigns and institutions, including China, is no longer in the top ten as its holdings of U.S Treasuries has fallen from $354.6 billion in January 2015 to $137.5 billion in January 2016.
Foreign Sovereigns and the Selling of U.S. Treasuries
Countries add U.S. Treasury Securites to their reserves as they are the world’s most liquid securities and can be held safely and sold when required to purchase oil, balance payments or defend currencies. Countries like China, that are net exporters to the United States, receive dollars that they use to buy U.S. Treasuries and build their reserves.
The United States benefits from foreign purchases of its debt securites as it allow it to incur massive deficits without having to raise taxes to pay for deficit spending. A reduction in demand for U.S. Treasuries by foreign purchasers may cause interest rates to rise and make servicing existing U.S. debt more expensive.
As oil producing countries struggle with the negative impact that the decline in oil prices has had on their currencies, selling U.S. Treasuries has become a viable option. China has chosen to support its currency by selling U.S. Treasuries while adding to their gold reserves. China shed another $8.2 billion in U.S. Treasury Securities in January 2016 and their net holdings remain relatively unchanged year over year at $1237.9 as of end of January 2016 vs. $1239.1 as of end of January 2015.
Declining oil prices also mean that countries that are net purchasers of oil need fewer dollar reserves to fund oil purchases and therefore need to hold fewer U.S. Treasuries adding to the potential selling pressure on U.S. Treasuries by foreigners, especially foreign official institutions.
While foreign official institutions have sold over $107 billion in U.S. Treasury Securities over the past two months ($51.3 billion in December 2015 and $56.3 billion in January 2016), net foreign private inflows were $175.8 billion in January 2016. U.S. Treasury bonds continue to pay a positive yield, unlike many foreign sovereign debt securities which now have negative yields. The positive yield has contributed to the increase in overall demand for U.S. Treasury Securities. “Safe Haven” buying by institutional investors has kept also kept overall demand for U.S. Treasuries strong.
*The U.S. Treasury notes that the data in its chart of Major Foreign Holders of U.S. Treasury Securites is “collected primarily from U.S.-based custodians and broker-dealers. Since U.S. securities held in
overseas custody accounts may not be attributed to the actual owners, the data may not provide a precise accounting of individual country ownership of Treasury securities.”
A complete set of TIC Data can be found here.
Nothing in this article should be construed as financial advice.