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China Sells U.S. Treasuries

Earlier today Bloomberg reported that in April, Chinese investors sold the most U.S. Treasuries in at least seven years. China sold a net $5.8 billion of Treasury securities, which is the first drop in holdings since October 2005. They held $414 billion of the $4.4 trillion in marketable Treasuries in April, making it the largest owner of U.S. debt. However, China’s actions to diversify its $1.2 trillion foreign exchange reserves, most of it in dollar-backed assets, may cause Treasury yields to rise and the U.S. dollar to fall. In March, China announced it was creating an agency to actively manage its reserves. “The old saying was ‘China would buy Treasuries come hell or high water’… The move to more active reserve management is going to spell trouble for Treasuries,” said Michael Gregory, a senior economist for BMO Nesbitt Burns in Toronto. Samarjit Shankar, global strategy director for the foreign exchange group at Mellon Financial Corp., told Bloomberg, “It’s part of the ongoing, gradual, long-term diversification story… It may not necessarily impact the daily market, but this does raise the concern about the dollar.” Bloomberg was the only major financial news outlet that picked up on this story. It will be interesting to see if China’s actions are the beginning of a trend to dump Treasuries.