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Originally published Monday, May 17, 2010 at 6:05 AM

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China boosts holdings of US Treasury debt by 2 pct

China boosted its holdings of U.S. Treasury debt for the first time in six months. That development could ease concerns that lagging foreign demand will force the U.S. government to pay higher interest rates to finance its debt.

AP Economics Writer

WASHINGTON —

China boosted its holdings of U.S. Treasury debt for the first time in six months. That development could ease concerns that lagging foreign demand will force the U.S. government to pay higher interest rates to finance its debt.

The Treasury Department reported Monday that China's holdings of U.S. Treasury securities rose in March 2 percent to $895.2 billion, the first increase since last September.

Total foreign holdings of Treasury securities rose 3.5 percent to $3.88 trillion.

The government reported that net holdings of long-term securities, which includes the debt of U.S. companies as well as government debt, rose $140.5 billion in March, the largest one-month gain on record. It surpassed the old record of a net increase of $135.8 billion in May 2007.

The big increase was influenced by two factors: a flight to safety by investors increasingly worried about the debt crisis in Europe; and a rebounding U.S. economy which has sparked greater interest by foreigners in purchasing U.S. corporate debt.

Investors have grown nervous about the ability of Greece and other heavily indebted nations to repay their debt. Last week, European nations and the International Monetary Fund assembled a nearly $1 trillion support package to convince investors that their bond holdings are safe. But markets have remained nervous.

Stocks slid Monday after the euro hit a four-year low. The Dow Jones industrial average fell more than 100 points in midday trading.

Gregory Daco, an economist at IHS Global Insight, said as the Greek debt crisis began to intensify in March, foreign investors sought refuge in the safety of U.S. Treasury bonds and notes. He said the rebound in the U.S. economy was also helping to attract investors to bonds issued by U.S. companies.

The overall U.S. economy, as measured by the gross domestic product, grew at an annual rate of 3.2 percent in the first three months of this year. It was bolstered by the strongest gain in consumer spending in three years.

"The strong first quarter real GDP and productivity growth as well as the recent surge in the dollar should continue to draw in foreign investment," Draco predicted.

Win Thin, senior currency strategist at Brown Brothers Harriman & Co. in New York, said he expected investors to continue to favor dollar-denominated assets over holdings in the euro, the common currency of 16 European countries including Greece.

"Given the debt crisis that Europe is struggling with, flight to safety will most likely favor the United States in quarter two," Thin said. "Really, would any reserve manager be moving aggressively into euros this past few months?"

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Net purchases of long-term U.S. debt had increased $47.1 billion in February after an increase of $15 billion in January.

Those gains were seen as a good sign that foreigners continue to be interested in U.S. debt securities even in a period when Treasury debt has soared.

China is the largest foreign holder of U.S. Treasury securities. The $17.7 billion increase in March left its holdings at the highest level since November.

Japan, the No. 2 foreign holder of Treasury securities, also increased its holdings in March. It raised them 2.1 percent to $784.9 billion.

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