WASHINGTON/NEW YORK – Japan surpassed China in June as the top holder of U.S. Treasurys after raising its holdings to a nearly three-year high, as the trade war between the world’s two largest economies intensified.
Holdings of U.S. bonds, bills and notes were increased by $21.9 billion to $1.12 trillion, the highest level in more than 2½ years, according to data released by the Treasury Department on Thursday. Meanwhile, China’s ownership rose for the first time in four months to $1.11 trillion, up by $2.3 billion.
The last time Japan held the position as America’s largest foreign creditor was May 2017. From January to May 2017, Japan held more Treasurys than China, data showed.
The nation has added more than $100 billion worth of Treasurys at a fairly steady pace since October 2018. “The generally low- and negative-yielding sovereign debt market makes Treasurys comparatively more attractive than European and Japanese debt,” said Benjamin Jeffery, rates strategist at BMO Capital Markets in New York. The steepening of the yield curve — when rates on long-term bonds are higher than short-term notes — in June made currency hedging costs “a bit less onerous for foreign buyers,” he added.
While benchmark 10-year U.S. yields have plunged to the lowest level since 2016 in recent months, the rate on 10-year Japanese government bonds is currently negative 0.23 percent. “The buying we have seen from Japanese investors is really a reflection of the globally low and negative yield environment,” said Jeffery.
Overall, major foreign holders of Treasurys held $6.636 trillion of U.S. government debt in June, up from $6.539 trillion in May, suggesting continued demand for the safe-haven asset. Foreign flows of U.S. Treasurys showed an outflow of $7.71 billion in June, from net selling of $32.785 billion in May. Foreign official institutions sold $14.605 billion during the month, compared with outflows from the same group totaling $21.998 billion in May.
Offshore private investors purchased Treasurys amounting to $7.071 billion in June.
Data also showed that after 13 straight months of selling, foreigners finally bought U.S. stocks in June to the tune of $26.589 billion, after outflows of $1.445 billion in May.
Foreigners also bought $99.1 billion in net long-term securities in April, after buying $4.6 billion in May, the report showed.
A cautious months-long calm in the U.S.-China trade war was interrupted in May when talks between the two sides broke down. In June the U.S. raised tariffs on $200 billion of Chinese goods to 25 percent from 10 percent.
While Trump and Chinese leader Xi Jinping agreed to a cease-fire in late June, that only lasted about a month before the U.S. president announced that on Sept. 1 he would impose a 10 percent levy on virtually every import from China not yet subject to duties.
This week, Trump partially backed down by delaying the 10 percent charge on certain items, including mobile phones and laptops, until Dec. 15 to stem the impact on holiday shopping. Beijing says it still plans to retaliate. China’s U.S. debt hoard has come under increased scrutiny in the trade dispute amid speculation that it could sell Treasurys in response. Earlier this month, the U.S. formally labeled China a currency manipulator after the yuan weakened past 7 per dollar.