Is China really dumping Treasury bonds and sending yields higher? A former US official explains the mystery

• China is not actually dumping its stockpile of US bonds, former Treasury official Brad Setser wrote.
• A large part of China's holdings are not accounted for in official US data, he said.
• While it has sold some Treasurys, Beijing has also bought up US debt in the form of agency bonds.

China isn't fueling the bond market rout with a large sale of its Treasury holdings but is instead reshuffling its US debt assets, Brad Setser, a former Treasury official, wrote for the Council on Foreign Relations.

With US Treasury yields surging to highs not seen in 16 years, economists have been looking for explanations for what is now one of the worst market crashes in history.

To be sure, central bankers have suggested more rate hikes are necessary to slow inflation, and strong economic data like Friday's blowout jobs report have added fuel to the bond rout.

Apollo Global Management's Torsten Sløk also pointed to China recently, citing official US data that shows the country sold $300 billion worth of Treasurys since 2021.

But Setser said such data presents an incomplete picture. Drawing on other sources, he estimated that China's overall US bond holdings have been relatively stable since 2015. 

Though China's holdings appear to be slipping on official US Treasury International Capital data, that's because the metric only reflects foreign holdings in US custodians, or the financial institutions that safeguard the assets, Setser explained.

"If a simple adjustment is made for Treasuries held by offshore custodians like Belgium's Euroclear, China's reported holdings of US assets look to be basically stable at between $1.8 and $1.9 trillion," he wrote.

Added to that, the US data fails to capture US asset holdings that were handed over to third-party management. China's State Administration of Foreign Exchange is known to hold accounts at global bond and hedge funds, as well as private equity firms, Setser noted.

He also pointed out that even where China has reduced its Treasury holdings, the sales are much smaller than other data suggest and purchases of US debt in other forms, such agency bonds, have increased.

Agency bonds are issued by government-sponsored enterprises, and some of the top issuers are US-backed firms like Fannie Mae and Freddie Mac.

In fact, Beijing's agency bonds once outpaced its Treasury assets, Setser said. Though it moved away from that market during the Fed's quantitative easing era, soaring yields on agency debt have brought back China's buying habit.

During 2022 and the first six months of 2023, China purchased over $100 billion agency debt and sold just $40 billion in Treasurys, he estimated.

"Bottom line: the only interesting evolution in China's reserves in the past six years has been the shift into Agencies. That has resulted in a small reduction in China's Treasury holdings – but it also shows that it is a mistake to equate a reduction in China's Treasury holdings with a reduction in the share of China's reserves held in US bonds or the US dollar," he wrote.