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

• China is not dumping its stockpile of US bonds, Brad Setser, a former Treasury official, wrote.
• A large part of China's holdings is not accounted for in official US data, he said.
• While it has sold some Treasurys, Beijing has 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.

After US Treasury yields surged to highs not seen in 16 years, economists have looked for explanations for what is now one of the worst market crashes in history.

Apollo Global Management's Torsten Sløk also pointed to China recently, citing official US data that showed the country had sold $300 billion worth of Treasurys since 2021. And in August, a $21.2 billion dump of US assets by China was largely made up of Treasurys.

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

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

"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 said.

He added that even where China had reduced its Treasury holdings, the sales were much smaller than other data suggested and purchases of US debt in other forms, such agency bonds, had increased.

Agency bonds are issued by government-sponsored enterprises, and some of the top issuers are US-backed firms such as 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 Federal Reserve's quantitative-easing era, soaring yields on agency debt have brought back China's buying habit.

In 2022 and the first six months of 2023, China purchased over $100 billion in 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," he wrote. "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."