Thursday, 7 May 2009

Wake up & smell the coffee! China goes short duration

When the largest investor in any asset aggressively reduces their exposure, it's time to reassess that investment.

With holdings of $744.2 billion, China is the largest foreign holder of US Treasuries. This amounts to 24% of foreign holdings.

However, in a recent research note, Standard Chartered note that:

"Although bulk buying of Treasuries has ended, China is not reducing its stock of US securities. It is reducing its holdings of agencies and maintaining growth in its holdings of Treasuries, but is switching from long-term to short-term securities (tenors of less than one year)... holdings of short-term Treasuries surged to USD 182bn in February 2009 from USD 19.87bn in September 2008."
In portfolio management terms, this equates to an aggressive short duration position - standard practice if you expect yields to rise. Perhaps the scale of this positioning (25% of their holdings in sub 1 year paper) is a measure of how much they expect yields to rise. Indeed, Chinese officials have recently been vocal about their concerns regarding Treasuries and the US Dollar.

Could this mark the reversal in the 20 year bull market for Treasuries? Dr. Marc Faber certainly thinks so...

"The asset market that has the highest probability of having a made a secular high (such as Japan in 1989, or the NASDAQ in March 2000) is the U.S. long-term government bond market. Despite a still-weakening economy and massive quantitative easing, long-term bond yields appear to be on the verge of breaking out on the upside."

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