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China’s view of U.S. Treasury debt: Sell the short-term, hold the long-term

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Have the Chinese really lost their appetite for U.S. Treasury debt? The answer is less clear-cut than it may seem.

The headlines after Tuesday’s government report on foreign investors’ purchases and sales of U.S. financial assets in December mostly focused on the drop in China’s total holdings of Treasury securities.

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That much is true: The value of Treasury debt held by China fell to $755.4 billion in December, down 4.3% from November and down 5.8% from the peak stake of $801.5 billion in May.

The decline in December pushed China back to the No. 2 spot among foreign owners of Treasuries. Japan reclaimed the No. 1 spot, holding $768.8 billion. A list of all the major foreign holders is here.

But China has not been dumping longer-term Treasury notes and bonds. In fact, Beijing has continued to boost its holdings of those issues, albeit more slowly than in the past: It added a net $4.6 billion in T-notes and T-bonds in December.

The Treasury debt China doesn’t want these days is the short-term stuff, meaning T-bills maturing in one year or less. The country’s holdings of T-bills plunged to $69.7 billion in December from $108.5 billion in November and $210 billion in May, according to Bloomberg News data.

T-bills, of course, pay next to nothing because the Federal Reserve continues to hold its benchmark short-term interest rate near zero. The current annualized yield on three-month T-bills is 0.09%. The Chinese appear to be figuring that they can do better than that yield in other investments -- including in longer-term Treasuries.

Despite China’s publicly stated concern about America’s ballooning federal debt, Beijing in 2009 remained willing to keep extending long-term credit to the Treasury by purchasing more notes and bonds.

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If China begins to liquidate its stash of longer-term Treasuries -- or just stops buying more -- that will send a much more worrisome message.

-- Tom Petruno

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