UPDATE Foreign holdings of Treasuries drop to lowest since May 2021 – data

NEW YORK, Nov 16 (Reuters) – Foreign holdings of Treasuries fell in September to their lowest level since May 2021, U.S. Treasury Department data showed on Wednesday, led by Japan and China whose currencies have struggled all year in the face of the resurgence of the dollar.

Offshore holdings fell to $7.296 trillion from $7.509 trillion in August. Foreign holdings in May last year stood at $7.144 trillion.

Japan’s treasury bill reserve fell to $1.120 trillion in September from $1.199 trillion the previous month. Japan, which remains the largest non-US holder of US government debt, reduced its load on Treasuries for a third consecutive month.

Part of the reduction could likely be due to Japan’s defense of its beleaguered currency, which has come under pressure as the Bank of Japan stuck to its ultra-loose monetary policy. This contrasted sharply with an aggressive Federal Reserve determined to stifle stubbornly high inflation.

Japan spent up to a record 2.8 trillion yen ($19.7 billion) intervening in the foreign exchange market in September to support the yen.

Over the year to the end of September, the yen has plunged nearly 22% against the greenback.

Holdings of No. 2 China also fell to $933.6 billion in September from $971.8 billion in August. Chinese Treasuries have been below $1 trillion for six consecutive months. In June, China’s holdings fell to $967.8 billion, the lowest since May 2010, when they held $843.7 billion.

The Chinese yuan, like the yen, also came under pressure against the dollar and analysts said its central bank may also have sold Treasuries to support the currency.

For the first nine months of the year, the dollar had gained nearly 12% against the Chinese currency.

On a transaction basis, foreigners continued to pile into US Treasuries and notes in September to the tune of $60.4 billion, following record inflows of a revised $175.2 billion in August.

Overall, however, investors sold Treasuries expecting the Fed to push the final federal funds rate between 5% and 5.25%.

The benchmark 10-year Treasury yield started September at 3.265% and ended the month at 3.804%, an increase of almost 54 basis points.

In other asset classes, US corporate bonds saw inflows in September of $5.52 billion from $9.50 billion in August. Foreigners have been net buyers of US corporate bonds for nine straight months.

Reporting by Gertrude Chavez-Dreyfuss and Alden Bentley; Editing by Jonathan Oatis and Lincoln Feast

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