(Bloomberg) — Treasuries extended losses after Chinese regulators were said to have advised the nation’s financial institutions to rein in their holdings of US government bonds due to concerns over market volatility.
Yields on 10-year Treasuries climbed as much as four basis points to 4.25% before paring the increase to two basis points. The rate on 30-year Treasuries rose three basis points to 4.88%. The Bloomberg Dollar Spot Index dropped 0.3%.
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Chinese officials had urged banks to limit purchases of US government bonds, and instructed those with high exposure to pare their positions, according to people familiar with the matter. The officials didn’t give any specific target on size or timing and the directive doesn’t apply to China’s state holdings of Treasuries.
While the request was framed around diversifying risk, it may reinforce a recent global trend that has seen the likes of India and Brazil lower their exposure to the world’s biggest bond market amid growing doubts about the appeal of US assets. Geopolitical risks such as President Donald Trump’s threats over Greenland have only deepened the unease and spurred the hunt for alternative assets such as gold.
“It’s the latest evidence of a pattern forming — a sign that the expectation of long-term structural outflows from the dollar is not just a mirage,” said Gareth Berry, strategist at Macquarie Group Ltd.
At the same time, the initial selling has been limited, said Kathleen Brooks, research director at XTB.
“If China was to ditch their Treasuries in a large-scale selling program, this would cause US and global yields to spike and would cause major disruption to the global economy,” she said.
“The bond market is taking the view that China won’t do this, and if they do reduce the size of their Treasury holdings they will do this in a slow and gradual way. Hence why yields are mostly stable so far.”
China-based investors’ holdings of Treasuries have halved to $682.6 billion, the lowest level since 2008, from a peak of $1.32 trillion reached in late 2013, according to official US data. Still, Belgium — whose holdings are usually taken to include Chinese custodial accounts — has seen its Treasury ownership quadruple since the end of 2017 to $481 billion.
Taken together with Chinese holdings of US agency bonds and equities, the Asian nation’s outstanding investment in American securities has remained relatively stable since late 2023. China is the third-largest foreign holder of Treasuries, after Japan and the UK.
A lot of the debt is held by Chinese official institutions and is likely to be quite short dated for liquidity reasons, said Martin Whetton, head of financial markets strategy at Westpac Banking Corp. “So what is left for the banks is small and China doesn’t exactly set the Treasury market on fire at the monthly auctions,” he added.
Overall, overseas holdings of US government bonds advanced in November to the highest level on record, according to data from the Department of the Treasury. Increases in Norwegian, Canadian and Saudi Arabian stockpiles helped offset another monthly drop in China’s total.
Treasuries have offered better returns than their peers, thanks in part to elevated yields. The securities have gained 5.3% over the past 12 months, ranking behind only Singapore and Israel among major developed sovereign debt markets.
Just last month, Trump warned European nations against retaliatory sales of US assets in response to his tariff threats related to Greenland. While significant tensions remain between Beijing and Washington, relations have steadied in the wake of a trade truce last year.
“It’s still more ‘diversify’ than ‘de-dollarize’ but it could give the market some further runway with the debasement trade,” said Charu Chanana, chief investment strategist at Saxo Capital Markets in Singapore. “China reserves and China banks have different objectives. Regulators can tighten bank exposure rules even while reserves still need liquid US dollar assets for intervention or liquidity management.”
–With assistance from Tom Fevrier.
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