China Cuts U.S. Treasury Holdings

China cut its U.S. Treasuries holdings to the lowest level since 2017 in March amid the trade dispute between the world’s two biggest economies.

It was only a slight reduction—the stake slipped by $10.4 billion, the first drop since November —but that was enough to bring the position down to a two-year low of $1.12 trillion, according to data the U.S. Treasury Department released Wednesday.

China owns more U.S. government debt than any other foreign nation, and slashing those holdings is viewed by some as a nuclear option—albeit an unlikely one—in the worsening trade negotiations. Bond markets were jolted last year when China officials recommended slowing or halting purchases.

The data preceded the recent deepening of the trade war between the U.S. and China that’s rattled financial markets and cast a shadow over the global economy. Both sides slapped new tariffs on the other this month. The escalating conflict has stoked speculation that China could turn to other tools as leverage, such as selling U.S. assets, though that option is often dismissed as improbable.

China’s share of all foreign-held U.S. debt fell for the ninth straight month in March, to 17.3 percent of the total, the lowest proportion since June 2006. Japan remained the second-biggest holder, with $1.08 trillion in March, up from February’s $1.07 trillion.

China’s holdings dropped even as foreign ownership of U.S. debt rose to a record high of $6.47 trillion, with overseas investors buying $88 billion in March, more than any month since September 2011. The increase coincided with a rally in Treasuries, with benchmark 10-year yields touching a 2019 low of 2.34 percent in March.

“With hindsight, recall that some of the foreign demand could have exacerbated the large rally which concluded Q1,” wrote BMO Capital Markets strategist Jon Hill in a note after the release.

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