China cuts US debt holdings amid Fed taper

China reduced its holdings of US Treasury debt in December by the most in two years as the Federal Reserve announced plans to slow asset purchases.

US government bonds held by China - the biggest US creditor - fell by US$47.8 billion, or 3.6 per cent, to US$1.27 trillion, the largest decline since December 2011, Department of the Treasury data released on Tuesday shows. At the same time, international investors increased holdings by 1.4 per cent, or US$78 billion, in December, pushing foreign holdings to a record US$5.79 trillion.

Yields on benchmark 10-year notes rose to 3 per cent in December, the most since July 2011, after Federal Reserve officials announced plans to begin scaling back the central bank's bond purchase programme, designed to keep borrowing rates low and jump-start the economy.

The prospect of tapering sent US government securities down 3.4 per cent last year, the first annual decline since 2009's record 3.7 per cent loss, the Bank of America Merrill Lynch US Treasury Index shows.

"The Chinese move to sell suggests central banks are becoming more wary of taking duration risk now with the Federal Reserve firmly into the tapering process," said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas, one of 22 primary dealers that trade with the Fed. "If China continues to sell again in the next month or two, then more worries will arise as to who will buy the country's debt."

Overseas investors held 48.8 per cent of the US$11.9 trillion in publicly tradeable US government debt outstanding at the end of last year. For all of 2013, foreign holdings of Treasuries rose 4 per cent, or by US$221.1 billion, the smallest rise since 2006.