Skip to navigationSkip to content
n employee counts U.S. currency near renminbi notes at a bank in Hefei, Anhui province, December 3, 2008. China is apparently shifting currency policy to permit depreciation of the yuan, a step to aid its slowing economy. But the risks involved in the shift mean any weakening is likely to be small. REUTERS/Stringer (CHINA). CHINA OUT. NO COMMERCIAL OR EDITORIAL SALES IN CHINA.
Hard to resist the green.

The US’s biggest banker might be bailing on long-term debt

Gwynn Guilford
By Gwynn Guilford


For those who worry that China might dump its $1.28 trillion in US government debt and wreak havoc on the US economy, the country’s $1.5 billion investment in US Treasury debt in July might seem heartening, particularly after it sold $21.5 billion in overall US debt in June. But a closer look at the data isn’t that comforting.

First off, China didn’t buy long-term Treasury debt. In fact, it sold it, unloading $6.5 billion in longer-term notes and bonds, as Moneybeat points out in this insightful post. That marks a reversal after China bought a combined $34.7 billion worth of those types of securities in May and June.

So what exactly did China buy? Shorter-term securities called bills—which mature in a year or less. The large volume of those purchases explains why China’s overall Treasury purchases hit $1.5 billion in July, despite the $6.5 billion it sold in notes and bonds.

This seems strange, given the timing. China has long bellyached about the low returns on long-term US government debt and made noise about its intention to buy other assets. But July wasn’t exactly the best time to act on those complaints given that long-term debt was unusually cheap. In fact, prices for 10-year Treasury notes hit a 23-month low on July 8. That proved inviting for everyone else; overall, foreign investors bought $31.1 billion in long-term US securities in July, after dumping $67 billion in June.

China also snapped up $20.2 billion in US agency debt (home mortgage-backed securities, as well as those sold by government-backed enterprises like Fannie Mae and Freddie Mac). That’s the most China has ever bought of that type of debt, surpassing its record $16.9 billion purchase in April. This isn’t that surprising given that these securities tend to have a much higher yield.

Though it’s too early to tell whether China’s central bank is actually pulling back from long-term US government debt, July’s data offer a reason to keep watching. China’s rush into mortgage-backed securities could help keep down US mortgage rates down, offsetting any pullback in MBS purchases from the Federal Reserve. And if the country continues to lean more on short-term debt purchases, that might be a sign that the People’s Bank of China wants to keep its assets liquid. Either could signal that China has fallen out of love with long-term US Treasurys.

Subscribe to the Daily Brief, our morning email with news and insights you need to understand our changing world.

By providing your email, you agree to the Quartz Privacy Policy.