China Moves Out of Treasuries to Support the Mortgage Market

Floyd Norris notes that China "was a net seller of Treasury securities in May" and says that it "unloaded about $6.6 billion" of them, across the yield curve. He asks: "Could the newfound hesitance to buy more Treasuries be a reaction to increasing protectionist sentiment in this country?"

No.

For one thing, China isn't actually selling anything. The first thing anybody writing about Chinese foreign-currency reserves should do is go and see what Brad Setser is saying. For one thing, Brad clarifies that China "allowed its total holdings to fall by not reinvesting maturing bonds and bills," rather than actually selling anything. But more to the point, Brad is very suspicious about the whole data release. "With Russia and China I know not to trust the TIC data," he says. "I fully expect to see a large upward revision in Russian and Chinese US holdings when the next survey data is released."

What's more, Norris wonders why the Chinese government might be buying fewer Treasuries and more Agency bonds. Might it be because that's exactly what the Bush Administration is asking it to do? Bloomberg's Josephine Lau reports:

The Bush administration is urging China's central bank to buy more government-backed mortgage bonds in an effort to sustain financing for U.S. home loans.
U.S. Department of Housing and Urban Development Secretary Alphonso Jackson is in Beijing to persuade the Chinese central bank to buy more securities from Ginnie Mae, a corporation under HUD that guarantees $417 billion in federally insured, fixed-rate mortgages.

I was kinda joking when I proposed that China might come in to support the CDO market. But it seems that the Bush administration is very serious about it getting the country to support the market in mortgage-backed securities.