Asia, Europe to ‘Stick It Out’ With Treasuries - Bloomberg

Asian states and Russia are likely to retain their U.S. Treasury holdings after Standard & Poor’s cut the U.S.’s sovereign credit rating to AA+ as European governments expressed confidence in the world’s largest economy.

Russia said the one-step cut “can be ignored.” South Korean officials put the downgrade on the agenda of an emergency meeting on global turmoil tomorrow. China’s official Xinhua News Agency said in a commentary the U.S. must cure its “addiction” to borrowing. With Europe battling its debt crisis, France joined the U.S. in questioning S&P’s reasoning.

For all the angst, policy makers from China to Japan to Southeast Asia are lured to Treasuries as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness. Asia accounts for about half of foreign-owned U.S. debt, Treasury data show.

“They won’t be happy about it, but Asian central banks will just have to hold on and stick it out,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. (WBC) in Sydney. “There is pressure on them to hold on to liquid assets and there is nothing more liquid than the Treasury market. At least Treasuries have been doing well and they aren’t holding on to distressed assets.”

China has accumulated $1.16 trillion in U.S. debt and is the largest individual foreign holder, while Japan’s intervention this week to sell an estimated excess of 4 trillion yen ($51 billion) presents a potential new source of demand.

Investors in Treasuries earned 3.12 percent in the three months ending July 31, based on Bank of America Merrill Lynch data. That means a $10 million holding earned $312,000 in the period.
Treasuries Rally

Treasuries have rallied in recent weeks even after S&P warned it may lower the rating from AAA, as investors sought a haven amid deepening concerns that the global economic rebound may fade. Yields on benchmark 10-year notes closed at 2.56 percent yesterday, before the S&P announcement of the cut to AA+, down from 3.12 percent a month ago.

Japan, the second-largest international investor in American government debt, sees no problem with trust in the securities, a Japanese government official said on condition of anonymity.

In the U.K., the world’s third-largest foreign holder of U.S. debt, Business Secretary Vince Cable said the dollar is “the key international currency” in the short run.