It's Not China That Is Dumping US Treasurys, It's Japan

Recent concerns about a liquidation by China of its US Treasury holdings appear to have been greatly exaggerated because according to the latest TIC data released at 4pm on Thursday, in December, China not only added $8.3 Billion to its holdings, bringing the total to $1184.9BN, or about $26 billion more than a year ago, but for the full year 2017, China added the most Treasury holdings going back seven years.

But while China appears content with its US paper inventory, it was the second largest foreign US creditor, Japan, that has been liquidating in recent months, and in December, Japan sold $22.6 billion in TSYs, bringing its total to $1,061.5BN, the lowest total since the start of 2012.

Other notable holders were mixed:

  • Russia sold $3.5BN to $102.2BN
  • The United Kingdom added $12.5BN to $250BN
  • Belgium, i.e. the proxy for China and other anonymous buyers, rose by $3.9BN to $119.2BN
  • Cayman Islands, i.e. hedge funds, also added some $2.5BN to $269.9BN

The good news for all these buyers of US debt is that thanks to Trump's budget, there's plenty more where that came from.

Looking at the broader universe of all US International capital transactions, in December, foreign public and private entities sold a total of $16BN in Treasurys while buying $16.4BN in Agencies; they also sold a modest $1.25 BN in corporate bonds.

But the biggest surprise was the surge in US stock purchases by public and private foreign entities, which in December amounted to a whopping $35.1 billion (of which official entities sold $5.3BN while private entities bought $40.3BN), the second highest monthly total on record, and smaller only compared to the record foreign buying in May 2007, when offshore entities bought a record $42 billion.

So in addition to buybacks, algos, CTAs, risk parities and a relentless retail bid, here is another reason for the tremendous equity meltup at the end of 2017: furious buying of US stocks by foreigners, a trend which will likely continue well into 2018.