Net purchases of long-term US treasuries and treasury bills by China, Hong Kong and the UK combined were just below $20 billion in May, and just $65 billion for the first five months of the year, according to research firm Capital Economics. The consultancy aggregates the data from the three centres because many Chinese purchases are routed through London and Hong Kong.
Capital Economics suggests that the currency market shouldn’t panic about the impact of depressed buying on treasury yields or the value of the dollar, however. It argues that, for all its talk of dollar diversification, China might start buying treasuries again in earnest once the US ends its latest round of quantitative easing, because this effectively removes a competitive buyer from the market.
Still, Nomura says in a note published yesterday that while official flows in treasuries are bouncing back, private flows are falling off to multi-year lows. Looking in aggregate, the overall flow picture remains a weak one. “With US Federal Reserve asset purchases now finished, foreign demand for treasuries could have a sizable influence on the broad dollar direction over the coming months,” write Nomura analysts Anish Abuwaia and Jens Nordvig.
The reduced demand from China is probably the result of a desire by the Chinese authorities to diversify their reserve holdings, yet its impact on treasury yields has been muted, writes John Higgins, an analyst at Capital Economics.
“So far, China’s possible diversification has not produced the sort of crisis that many have worried about,” he says, pointing out that, while the dollar declined in the first five months of 2011, treasury yields have in fact declined. This could be a reflection of interest-rate expectations between the US and China, however; the Fed isn’t expected to raise interest rates until 2012, while the Chinese authorities are attempting to cool inflationary pressures.
Interestingly, as Nomura notes, the May figures from TIC show increased foreign demand for assets in some commodity currencies. Canadian flow data shows increased foreign demand for Canadian dollar-denominated bonds. This trend is even more pertinent, given the current risk environment with concerns over potential sovereign default in Europe, and the resulting fear of global contagion.
Typically, that risk environment would result in US dollar strength, but that hasn’t been the case, say the Nomura analysts. They point out that even risky-asset underperformance (proxied by the S&P500) has not coincided with material strength for the US dollar. “It is possible that the suddenly weak private-sector demand is the underlying reason for this falling correlation,” say Abuwaia and Nordvig.
| Net Purchases of US treasuries & T-bills via China, HK and UK ($BN) (4M rolling total) |
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| Sourced- Thomson Datastream, US Treasury, Capital Economics |