China boosted its Treasury holdings in September

China, the biggest buyer of U.S. Treasury securities, boosted its holdings for the third straight month, the Treasury Department reported Tuesday.

China's holdings of Treasury debt rose to $883.5 billion in September, the Treasury Department said in a report. That's a 1.7 percent increase from August. For much of this year, China has been increasing its holdings of Treasury debt.

The report shows that China and other countries still have a robust appetite for Treasury debt even as the U.S. government is running annual budget deficits topping $1 trillion. Overall, foreign governments increased their purchases of Treasury securities by $39.5 billion in September, a record high. A sustained drop in foreign demand for Treasury debt could lead to higher U.S. interest rates, slowing the economy.

Japan, the second-largest holder, expanded its portfolio of Treasury debt to $865 billion, a 3.4 percent increase from August. Britain, the third-biggest holder, boosted its stake to $459.1 billion, a 2.1 percent increase.

Total holdings of Treasury securities by all countries rose to $4.2 trillion in September, an increase of 1.3 percent from August. Of that total, $2.8 trillion is held by foreign governments and central banks.

The report also showed that foreign governments and central banks cut their holdings of Fannie Mae and Freddie Mac bonds for the third straight month. Those holdings were cut by a record $31.4 billion in September. The previous record monthly reduction was $16.5 billion in October 2008, the height of the U.S. financial crisis and one month after the U.S. government's takeover of the two mortgage giants.

Looking ahead, economists predicted that demand for all kinds of U.S. securities — including Treasury debt — will stay strong.

"On one side, stronger growth evidence in the U.S. will prop up demand for equities, while on the other the resurgence of sovereign debt worries in Europe will lead foreign investors back into the safe haven of U.S. Treasuries," said Gregory Daco, U.S. senior economist at IHS Global Insight.