Official U.S. data shows that in February, when market expectations for a Fed rate cut this year cooled sharply and U.S. Treasury prices fell significantly, China, the second-largest foreign "debt holder," continued to reduce its holdings, while the largest "debt holder," Japan, may continue to buy against the market.
On Wednesday, April 17th, U.S. Eastern Time, the U.S. Department of the Treasury released the Treasury International Capital (TIC) report. The report indicates that in February, Japan held $1.1679 trillion in U.S. Treasury securities, an increase of $16.4 billion month-on-month, marking the third consecutive month of record high holdings since August 2022. To date, Japan's holdings have increased for five consecutive months and for eight out of the last nine months.
Since overtaking China in June 2019, Japan has been the largest overseas holder of U.S. Treasury securities. In 2023, Japan's holdings decreased only in February, May, and September, with a net increase of $63.1 billion for the year.
According to the TIC report, in February, Mainland China held $775 billion in U.S. Treasury securities, a decrease of $22.7 billion month-on-month. After two consecutive months of increases, holdings have fallen for two consecutive months, approaching the low point set over five consecutive months since October last year, which is the lowest in fourteen years since 2009.
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As of February, China remains the second-largest foreign holder of U.S. Treasury securities, below Japan. Since April 2022, China's holdings have been below $1 trillion. In 2023, China's net reduction in U.S. Treasury holdings was $50.8 billion. The holdings increased only in March, November, and December, and in the nine months of reduction, all months except April and October saw a decrease of over $10 billion.
Among the top ten U.S. Treasury holding countries and regions listed in the February TIC report, Switzerland, ranked tenth, had the largest decrease in holdings, amounting to $26.5 billion, followed closely by China, while Japan had the largest increase in holdings, with France, the second-largest increaser, adding $15.4 billion. France's total holdings are ranked ninth.
Wall Street Journal has mentioned that the significant rebound in U.S. Treasury prices in the last two months of last year boosted the interest of foreign central banks in U.S. Treasury allocations. Previously, a hedge fund manager estimated that the rise in U.S. Treasury prices in December could result in an increase in the valuation of U.S. Treasury holdings of tens of billions of dollars for the three major U.S. "debt holders" of China, Japan, and the UK. In January, when expectations for a Fed rate cut were dampened and U.S. Treasury prices fluctuated, only Japan's holdings continued to grow, suggesting possible increases, and in February, both Japan's and the UK's holdings increased.
Market data shows that in February, the three major U.S. stock indices rose for the fourth consecutive month, with the S&P and Dow Jones Industrial Average both reaching their largest gains in the first two months since 2019. The yield on the benchmark ten-year U.S. Treasury note rose by more than 30 basis points, and the yield on the interest rate-sensitive two-year U.S. Treasury note climbed by more than 40 basis points; the U.S. Dollar Index rose for two consecutive months; gold fell for two consecutive months.
However, China's momentum in increasing gold holdings did not change due to the fall in gold prices. The State Administration of Foreign Exchange announced last month that China's gold reserves continued to grow for the 16th consecutive month, reaching 72.58 million ounces, with a total increase of 9.94 million ounces over 16 months. As of the end of February, China's foreign exchange reserves were $3.222582 trillion, an increase of $6.5 billion month-on-month, a rise of 0.20%, after a decline in January, marking the third consecutive month of growth in four months. The foreign exchange authority reiterated that the scale of foreign reserves is affected by a combination of factors such as exchange rate conversion and changes in asset prices, noting that the U.S. Dollar Index rose in February, and global financial asset prices fluctuated.
Some media have mentioned that in the medium to long term, the willingness of foreign capital to invest in U.S. Treasury securities will continue to diverge. On the one hand, many private capitals are betting on the profit opportunities of U.S. Treasury securities brought by this year's Fed rate cuts. On the other hand, foreign central banks are still steadily advancing the diversification of foreign exchange reserves. An increasing number of central banks are considering allocating gold as an alternative to U.S. Treasury securities. Inflation, geopolitical risks, Western sanctions, and the trend towards a multipolar global reserve currency system are all major factors driving central banks to continue increasing their gold reserves.Gold prices have surged since the end of February this year, with the New York futures gold closing price rising nearly 18% from February 28th to this Tuesday. Global central banks, including the People's Bank of China, are seen as a major driver of the gold rally. A report released by the World Gold Council at the end of January showed the trend of central banks' large-scale gold purchases last year: in 2023, global central banks bought a total of 1037 tons of gold, the second-highest annual scale in history, only 45 tons less than in 2022, and last year's purchases by central banks accounted for about a quarter of the total global gold demand.
The World Gold Council also expects strong demand from central banks this year. Its survey shows that over 70% of the surveyed central banks expect global gold reserves to increase in the next 12 months. The report predicts that driven by expectations of a shift to a more accommodative stance by the Federal Reserve, the demand for gold is expected to climb further this year after reaching a new high last year.
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