Japan poised to overtake China as America's biggest creditor

SINGAPORE (BLOOMBERG) - Japan is set to overtake China as America's largest overseas creditor when the US issues holdings data on Wednesday.

China cut its investment in Treasuries for a fifth month in January, while Japan added US$7.7 billion (S$10.5 billion), narrowing the gap to US$1 billion, the latest data showed. The US is depending on investor demand to hold borrowing costs in check as the Federal Reserve prepares to raise interest rates. The nation offers higher yields than Japan and relative safety amid uneven global economic growth.

"Japanese rates are still low" and that will drive demand from the nation, said James Chiu, a bond analyst in Taiwan at Hontai Life Insurance Co., which oversees the equivalent of US$6.7 billion.

Foreign investors represent "big purchase power" that will help suppress yields, he said. "The US Treasury is the safest security in the world."

The benchmark US 10-year yield was little changed at 1.90 per cent as of 6:47am New York time, according to Bloomberg Bond Trader data. The price of the 2 per cent note maturing in February 2025 was 100 30/32.

Ten-year yields were 0.325 per cent in Japan. The two-year yield fell to zero on Wednesday.

The U.S. Treasury is set to release investment figures for February at 4pm in Washington. China held US$1.2391 trillion of the securities as of January. Japan boosted its holdings to US$1.2386 trillion. China has held more than Japan since 2008.

The two Asian nations each own almost 10 per cent of the US$12.6 trillion in publicly traded US debt. Total foreign holdings account for about half of the market.

Presidential candidate Hillary Clinton used a trip to China six years ago as secretary of state to urge the country to keep up its purchases of Treasuries, underscoring the importance of foreign demand.

Will Tseng, a portfolio investor in Taipei at Mirae Asset Global Investments, said he doubted overseas buying will offset the Fed. The latest Bloomberg survey of economists shows the 10- year yield will climb to 2.54 per cent by Dec. 31.

Officials may also consider selling the central bank's Treasury holdings after five years of debt purchases to support the economy, he said.

"The market is concerned about what the Fed will do," said Tseng, a portfolio investor in Taipei at Mirae Asset Global Investments, which oversees US$63.9 billion. "If the Fed decides to start selling bonds next year, even if China or Japan keep buying Treasuries, the yield will still keep rising."

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