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China, Japan Reduced Its Holdings of U.S. Debt the Past Year

This article was originally published on ETFTrends.com.

A volatile end to 2018 saw many investors seek bonds as a defensive play to shield themselves of the constant market oscillations. In particular, Treasury notes saw an influx of investor capital as a result of a shift to a risk-off sentiment, but China and Japan have been reducing their holdings of U.S. debt within the past year.

After the election of U.S. President Donald Trump in 2016, China and Japan increased their portfolio of U.S. debt, but that has taken a different course the last 12 months.

"Following the 2016 election, China increased its U.S. bond holdings substantially," wrote Simon Lack of SL Advisors. "Japan was more cautious. But both have been reducing them over the past year. China’s moves have been more recent, and coincide with the growing trade spat. Interestingly, there’s been no discernible impact on bond yields."

China, Japan Reduced Its Holdings of U.S. Debt the Past Year 1

Both China and Japan could be losing their confidence in the U.S. as stocks continue to fall. Of course, there's also the known unknown--ongoing trade negotiations between the U.S. and China--a trigger event that could send markets surging against and restore confidence in U.S. debt.

2018 saw the Dow fall 5.6 percent, while the S&P 500 lost 6.2 percent and the Nasdaq Composite fell 4 percent–the worst year for stocks since the financial crisis more than 10 years ago. December alone resulted in the Dow falling 8.7 percent and the S&P 500 losing 9 percent, making it the worst December since 1931.

Part of the blame can go to rising interest rates--four rate hikes were instituted by the central bank in 2018. A more dovish Fed following the last rate hike in December could pare down the number of rate hikes even more.

"Although the Fed is expecting to raise rates twice next year (2019), bond yields continue to forecast less than that," Lack noted. "For fixed income investors, it continues to be hard to beat inflation after taxes. Equities are cheap as shown recently by the Equity Risk Premium (see Stocks Are the Cheapest Since 2012). The American Energy Independence Index yields 6.9%. Bonds are unlikely to provide much value."

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