Bond market sell off caused by Chinese diversification – what is next?
Sam Adelton
Jun. 16, 2007

Starting in April, China has diversified its asset allocation in its foreign currency reserves. They used to hold approximately 5% of all the US Treasuries. China, which owns more U.S. debt than any foreign nation except Japan, sold a net $5.8 billion of Treasuries, the first drop in holdings since October 2005, according to Treasury Department figures that go back to 2000. The same trend has continued in May and June causing one of the biggest sell offs in the bond market in absence of any significant news.

Fixed income investors ask a question – what is next? Are the Chinese done with their so-called diversification? International think tanks believe the Chinese diversification is not complete, although they might take a long pause before selling more US Treasuries. A higher long-term rate in US is detrimental for the Chinese trade. So they are trying their best to distribute the Treasury Notes slowly and steadily.

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