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China has reduced its holdings of US debt to the lowest level in two years

The Treasury Department in Washington, D.C.

Adam Jeffery | CNBC

As trade tensions intensified with the United States, China sold its Treasury holdings at the fastest pace in two years in March.

The largest foreign owner of US debt has reduced the level of nearly $ 20.5 billion, a slight decrease that brought the total assets to $ 1.12 trillion. However, this decision represents a continuing downward trend, attributable to the inability of both parties to conclude a long-term trade agreement. Rather, they have engaged in an unprecedented customs struggle that has intensified in recent days.

In the 12-month period ending in March, the last month for which data are available, the Chinese government's holdings of notes, bonds, and effects decreased by $ 67.2 billion, a decrease 5.6%. The total amount has decreased by some $ 200 billion since the 2012 peak and now accounts for 7% of total US debt outstanding, compared to 12% previously, according to UBS.

The threat that the country does not buy Treasury Bills or does not make direct sales has already shaken the bond market. In addition to the punitive measures China may take, it is thought that it has reduced its holdings in order to defend its currency.

More aggressive measures to reduce assets are seen as a nuclear option that could worsen ongoing trade negotiations.

The impact of such movements is however unclear.

UBS believes that if the reduction is gradual, it would likely result in an increase in the 10-year benchmark Treasury return by no more than 0.4 percentage points.

"To the extent that Chinese Treasury sales could be the cause or effect of a more risk-averse global environment, the positive impact on Treasury yields could be less than expected if private investors were strengthening their purchases in the Treasury, "said the strategist UBS, Chirag Mirani and others said in a note to customers.

China's share of total US debt relative to other world governments has declined to 17.3%, its lowest level since June 2006. Japan remains the second largest holder, with 1 , $ 8 trillion, while the United Kingdom returned to third place, rising to $ 317.1 trillion.

Foreign governments' participation in US debt reached a new record of $ 6.47 billion, up 4% from the previous year, as the government's total debt continues to grow to 22 trillions of dollars. Foreign residents increased their holdings by $ 23.9 billion.

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