Stock, ETF Slump Drives China to U.S. Treasuries

As stocks, exchange traded funds (ETFs) and other securities plummeted in September, the Chinese turned to the safe haven of government debt and became the largest foreign holder of U.S. Treasuries.

It appears that most foreign investors have been attracted to U.S. assets. The Treasury department states that the net foreign purchase of long-term equities, notes, bonds  and short-term securities lunged from $21.4 billion in August to a whopping $143.4 billion in September.

China led the way, purchasing $43.6 billion in Treasury holdings, posting a net increase in U.S. Treasuries for the sixth month out of the past seven, bringing its total to $585 billion, states John Brinsley and Rebecca Christie of Bloomberg. Japan is the second-largest owner of U.S. debt, holding $573.2 billion.

China’s status as the leader in ownership of U.S. government debt is not surprising.  Over the past few years, they have been accumulating Treasury holdings at an alarming rate, doubling over the last three years.  The remarkable yield on the benchmark U.S. 10-year note may be the reason why.  According to Merrill Lynch & Co.’s U.S. Treasury Master Index, the yield on the 10-year note averaged 3.68% in September and 3.88% in August and Treasuries returned 1.8% in September.

• iShares Lehman 1-3 Year Treasury Bond (SHY): is up 5.6% for the year

• iShares Lehman 10-20 Year Treasury Bond Fund (TLT): is up 7.9% for the year.