Who Bought U.S. Treasury bonds against Sell-off by China

In a previous post, we could confirm starts of decline in global foreign reserves since 3rd quarter last year, signaling realized sell-off U.S. treasury bonds and German Bunds especially in a long-end tenor. So, market participants this as the Quantitative Tightening.

And then, who bought treasuries against sell-off by EMs including China particularly?
We couldn't guess that obviously because of a lack of data. U.S. FRB released data until 2nd quarter without details of total private demand in September, this month, report.

So, we should estimate the possible demand as use of limited data. See the below chart about yearly change of U.S. treasury holdings, billion dollars, by main drivers for recent years.

(1) U.S. banks have increased treasury bond position continuously as known that they have to increase due to Volker Rule. The pace have been somewhat rapid to be sufficient to underpin the bond price for couple of years. In 2nd and 3rd quarter, they may have increased treasury bond position as considering sell-off by PBoC as the opportunities. If then, however, the pace of buying should not maintain permanently. Their bought would end when their capital ratios are sufficient. In fact, the speed seemed to turn slow since mid 2014.

(2) U.S. mutual funds positions have been enhanced since early 2014 when the fear about QE tapering started to diminish. And the size of bond funds have been in line with lowering bond yields during couple of years. But, they are not market makers, but followers. So, if the rates set the direction toward upside, the outflow from mutual bond funds would arise.

(3) Last, foreign private demands. They are the biggest demand sides to increase holdings for U.S. treasury bonds. Someone argues this side should offset the sell-off by EMs' central banks from decreasing foreign reserves.

But, we should consider foreign private investors as diversify various parts such as insurance companies, pension funds, mutual funds and banks. Total numbers hardly suggest something special. Anyway, this total number, increasing size from a previous year, started to decline since 3rd quarter last year in line with global foreign reserves. This means foreign private investors are not free from capital outflows.

So, if additional sell-off by EMs comes, the bond yield could be pushed higher, I believe, while this data does not suggest recent months' demands for U.S. treasury exactly yet.

Source : Treasury's Bureau of the Fiscal Service