The odds are that China isn’t actually selling dollar bonds. Or even moving its reserves out of the dollar. A new blog on how to interpret the US TIC data.
A couple of notes on the blog. It goes through, in great detail, how to find China’s Agency holdings and how to adjust the reported TIC data (in the major foreign holdings table) for China’s use of non-US custodians.
I have realized that many sophisticated market players haven’t spent as much time with the data as I have over the years, and think I have learned a trick or two. Knowing how to find China’s dollar holdings during the 2012-16 period actually helps a lot now.
And I have a pretty high degree of confidence in my basic approach because I was able to see China’s disclosed diversification between 2005 and 2015 in real time (the diversification was disclosed with a lag, and I think it actually was complete by 2012.
So while it superficially seems like China is shifting out of US Treasuries because of the fall in its reported holdings of Treasuries, I don’t think that is what is actually happening – China has really been shifting into Agencies and into Euroclear custodied Treasuries.
This chart is I think important — China has reallocated its portfolio a bit, but it doesn’t appear to have shifted its formal reserves out of the dollar (its shadow reserves are also in dollars, but they aren’t in the TIC data).
Finally a bit of additional color for the market professionals. China clearly added to its dollar bond holdings in 2022. Its holdings have fallen (for real) just a bit in 2023, but the bulk of the fall was in January (when the bond market was calm and the CNY was strong.
There was a small reduction of China’s total US bond portfolio in July, but nothing huge. There isn’t US data for August, and the Chinese reserve proxies for August were pretty calm. Nothing yet for September.
And China can have an impact on the bond market even if it isn’t directly selling Treasuries. If the cash flow from maturing Treasuries isn’t being reinvested back into Treasuries but is instead being used to build up a cash buffer, that’s less demand for duration.
If China reinvested the proceeds from maturing 10y or 5y bonds into Agency MBS rather than into Treasuries, that should reduce the Treasury-MBS spread (both pushing down MBS spreads and pushing up Treasury yields).
And if China is barbelling its portfolio — shifting out of the 6-10ys and into Agency MBS and 2ys (as I suspect but cannot prove) that’s also a fall in demand for Treasury notes.
And if China isn’t reinvesting the substantial (over 3%, maybe now close to 4%) coupon it gets on its USD portfolio back into Treasuries, that’s a missing flow that impacts the market.
But I am pretty confident Chinese sales aren’t the reason for the latest move in the 10y. Certainly the lagged data that is currently available doesn’t show significant sales, or even much roll off.
Source Credits: Mr. Brad Setser, X