China, the largest foreign creditor to the U.S., increased itsownership of Treasuries in October to almost the record levelreached in July 2011 after the Federal Reserve unexpectedly optednot to slow bond buying.

Holdings rose $10.7 billion, or 0.8 percent, to $1.304 trillion,according to Treasury Department data released yesterday. Chinaheld a record $1.314 trillion in July 2011. Total foreign holdingsof Treasuries rose $600 million, or 0.01 percent, in October to$5.65 trillion.

Fed officials surprised traders and roiled markets across theglobe on Sept. 18 by maintaining $85 billion in monthly purchases.Policy makers won't start curtailing quantitative easing this week either,according to 66 percent of economists surveyed Dec. 6 by Bloomberg.China's demand for Treasuries rose as foreign currency reservesjumped 4.7 percent in the July-September period and the People'sBank of China sought to keep the yuan within its managed tradingrange.

“As money enters that country, that gets turned intointervention, and that intervention gets turned into Treasuries,”said John Briggs, a U.S. government bond strategist at RBSSecurities Inc. in Stamford, Connecticut, one of 21 primary dealersthat trade with the Fed. “When they didn't taper, a lot of pressurecame off of those markets and some money flowed into emergingmarkets, including China.”

China's yuan traded at 6.0712 per dollar as of 11:41 a.m. inShanghai, from 6.0715 yesterday, China Foreign Exchange TradeSystem prices show. The currency has appreciated 2.6 percentagainst the greenback this year and touched a 20-year high of6.0703 on Dec. 10.

Borrowing Limit

U.S. government securities held by overseas investors haveincreased 1.4 percent this year, on track for the slowest risesince the Treasury began releasing full-year data in 2001.

Foreign holdings rose even as U.S. lawmakers faced an impasse onspending and borrowing limits, which lasted until a day before theTreasury's statutory borrowing limit was reached Oct. 17.

“It was some pent-up buying post shutdown resolution,” saidShyam Rajan, an interest-rate strategist in New York at Bank ofAmerica Corp., a primary dealer. “People wanted to buy after theno-taper decision, but probably didn't go all-in because they hadthe debt ceiling and shutdown to be resolved.”

Treasuries held in custody for foreign central banks by the Fedhave climbed 1.9 percent, or $54.8 billion, in the eight weekssince Oct. 16, central bank data show.

Japan, the second largest foreign lender to the U.S., reducedits holdings of U.S. government debt for the first time since Juneby $3.7 billion, or 0.3 percent, to $1.17 trillion.

China's Annual Increases

China has increased its holdings 6.9 percent this year throughOctober and is on track for the biggest gain since its stake inTreasuries rose 30 percent in 2010.

PBOC Deputy Governor Yi Gang said last month that it's no longerin the nation's interest to increase its foreign-exchange reserves.The holdings are the world's largest and surged $166 billion in thethird quarter, to a record $3.66 trillion.

The monetary authority will “basically” end normal interventionin the currency market and broaden the yuan's daily trading limit,PBOC Governor Zhou Xiaochuan wrote in an article in a guidebookexplaining reforms outlined at a November Communist Party meeting.The exchange rate is allowed to diverge a maximum 1 percent fromthe central bank's daily fixing, which was set at 6.1108 per dollartoday.

Japan has increased its position in Treasuries by 5.7 percentthrough October and is on track for its sixth annual rise inholdings of the debt.

Hong Kong boosted its Treasury ownership by 7.8 percent or $9.8billion, to $136.3 billion, Treasury data show. Hong Kong's stakein the securities had fallen 15.4 percent to $120 billion in Julyfrom $141.9 billion at the end of 2012.

Luxembourg's position in Treasuries fell 5.5 percent, or by $7.8billion, to $133.3 billion. U.S. government securities held byinvestors in the country have declined 14 percent since December2012 from $155 billion.

Holdings by members of the Organization of Petroleum ExportingCountries fell 3.7 percent to $236.6 billion, the lowest since May2011.

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