HEARD ON THE STREET
AUGUST 17, 2009
Households Start to Rival the Chinese in Treasury Market
By ANDREW BATSON
China is center stage when it comes to fears that buyers will one day spurn U.S. Treasurys. The bond market has been the source of much political theater between the U.S. and China in recent months, with Chinese officials passing up few chances to lecture the U.S. on its profligacy.
But that has obscured an important change: The market for Treasury bonds is now more reliant on U.S. buyers -- including the Federal Reserve after its recent buying spree -- than the Chinese.
China held $801.5 billion in Treasury debt at the end of May. The Fed at that time held about $598 billion, although that has now risen to $704 billion. The latest figures for U.S. households, from the first quarter, showed holdings of $643.9 billion -- more than double the $266.6 billion in the fourth quarter of 2008.
The rising budget deficit, which has led to record issuance in recent months, doesn't necessarily mean the government is becoming more indebted to foreigners. While the U.S. government is borrowing furiously, the current account deficit has actually halved from an annualized $829 billion in mid-2005 to an annualized $409.5 billion in the first quarter of 2009. That shows the U.S. is now less dependent on external financing, because it is saving more domestically. The U.S. government may be in hock, but it is increasingly to its own citizens.
China's monthly purchases of Treasury bonds have actually picked up since 2008, but by much less than the government has expanded sales of bonds.
And U.S. households stepped in to purchase 86% of all new Treasury issues in the first quarter, according to flow-of-funds data. The next snapshot of household appetite will come in September.
Since the first quarter risk appetite has picked up. But Treasurys still account for only 1% of total household assets. Although that is the highest since 2001, Treasurys regularly made up 5% of assets in the 1950s, and as recently as 1995 they were at 2.6% of assets.
History suggests there is plenty of room for households to increase their holdings.
The Chinese government may be politically uncomfortable with lending money to the U.S., but it remains locked into purchasing Treasury bonds because of its currency's tight peg to the dollar. The challenge for the U.S. government isn't just reassuring China.
It also is to maintain the confidence of the domestic investors who are an increasingly important source of financing for the wave of government debt supply hitting the market.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
But that has obscured an important change: The market for Treasury bonds is now more reliant on U.S. buyers -- including the Federal Reserve after its recent buying spree -- than the Chinese.
China held $801.5 billion in Treasury debt at the end of May. The Fed at that time held about $598 billion, although that has now risen to $704 billion. The latest figures for U.S. households, from the first quarter, showed holdings of $643.9 billion -- more than double the $266.6 billion in the fourth quarter of 2008.
The rising budget deficit, which has led to record issuance in recent months, doesn't necessarily mean the government is becoming more indebted to foreigners. While the U.S. government is borrowing furiously, the current account deficit has actually halved from an annualized $829 billion in mid-2005 to an annualized $409.5 billion in the first quarter of 2009. That shows the U.S. is now less dependent on external financing, because it is saving more domestically. The U.S. government may be in hock, but it is increasingly to its own citizens.
China's monthly purchases of Treasury bonds have actually picked up since 2008, but by much less than the government has expanded sales of bonds.
And U.S. households stepped in to purchase 86% of all new Treasury issues in the first quarter, according to flow-of-funds data. The next snapshot of household appetite will come in September.
Since the first quarter risk appetite has picked up. But Treasurys still account for only 1% of total household assets. Although that is the highest since 2001, Treasurys regularly made up 5% of assets in the 1950s, and as recently as 1995 they were at 2.6% of assets.
History suggests there is plenty of room for households to increase their holdings.
The Chinese government may be politically uncomfortable with lending money to the U.S., but it remains locked into purchasing Treasury bonds because of its currency's tight peg to the dollar. The challenge for the U.S. government isn't just reassuring China.
It also is to maintain the confidence of the domestic investors who are an increasingly important source of financing for the wave of government debt supply hitting the market.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
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