- A December US Treasury report showed Japan is once again the largest foreign holder of US Treasuries.
- China was the largest foreign holder for only a little over a year—and despite the dearth of media coverage, Japan has always been a close second.
- Ultra-safe investment in Treasuries is necessary as long as the Chinese maintain a currency peg to the dollar and their exports and investments attract US dollars.
- Any slow move out of Treasuries may send prices down gradually, but would also push yields higher—incenting other countries to take up the slack.
- The lion's share of Treasuries is still held domestically by individuals and the largest holder of all—our own government.
Iconic Abbey Road studios—responsible for rock classics like the Beatles' Abbey Road (and most of the rest of their formidable repertoire) and Pink Floyd's Dark Side of the Moon—is up for sale. But just who's courting its owner, EMI, remains under wraps. Could be a British buyer, the Americans, or heaven forbid—a Chinese invasion! Who knows? After all, China seems to be gobbling up less US government debt of late.
A December US Treasury report showed Japan is once again the largest foreign holder of US Treasuries. This may seem significant, considering all the press China garnered during its reign—calls for a global currency had folks fearing market-roiling action. But up-and-coming economic powers are always cast as challengers to the throne. Anything they buy—Treasuries, real estate, icons like Coca-Cola, Apple, and Goodyear (whatever!)—is a sure sign the world is their oyster. (Japan's buying spree in the eighties had American businessmen learning Japanese and donning Kimonos.)
Titanic economic shifts, however, rarely happen overnight—and global investors reap the benefits no matter which country leads. Further, while it may have seemed China's Treasuries holdings would only grow (and with them their economic clout), the Chinese were the largest foreign holder for only a little over a year—and despite the dearth of media coverage, Japan has always been a close second. (Where's the drama in a democratic ally and staunchly capitalist country holding our debt?)
Even as the Chinese reduce their portfolio a bit, we struggle to see the catastrophe. Bottom line: They still need dollars. Ultra-safe investment in Treasuries is necessary as long as they maintain a currency peg to the dollar and their exports and investments attract US dollars.
And if they do decide to unload Treasuries en masse (no sign of that yet), it would happen very slowly. Like any institutional-sized investment, a sudden bulk sale would negatively pressure bond prices—something the Chinese aren't eager to see happen. And while a slow move out of Treasuries may send prices down gradually, that would mean moderately rising yields—incenting other countries to take up the slack.
In any case, just what would the Chinese (or other foreign holders) replace Treasuries with? The world flooded into US government debt—not German bunds or UK bills—when push came to shove during the financial crisis. The safety of America's deep capital markets remains unmatched. In fact, the primary culprit for the foreign holder flip-flop was China unloading short-term bills purchased at the height of the crisis (though it notably remained a net long-term Treasury buyer, adding $4.6 billion in total). That's a sign of a strengthening economy. And if they're selling, someone else is buying—in this case, we'd bet it's American banks, who hold significantly more reserves today than a few years ago. Nothing menacing there.
No matter what the Chinese or Japanese do, foreign holders only make up a fraction of the Treasury market and individual countries even less. The lion's share of Treasuries is still held domestically by individuals and the largest holder of all—our own government. It might seem weird the government could hold its own debt. But our huge entitlement programs (Medicare, Medicaid, Social Security, et al) are awash in cash, and the law requires they invest it in something very safe—i.e., US Treasuries. That requirement's not likely to change any time soon.
The horse race between foreign Treasury holders will always attract a few headlines—but investors needn't handicap it. For now, the US is in no danger of losing its status as sterling debtor. And the economic recovery will continue regardless of who holds the most Treasuries—not to mention Abbey Road.