Reposted from The New York Times
Floyd Norris | September 21, 2012 | NY Times
A YEAR ago, when the United States government was borrowing huge amounts of money and paying very low interest rates to do it, critics scoffed that a lot of Treasury bonds were being purchased by China, and even more of them were ending up in the hands of the Federal Reserve, the American central bank.
What would happen if China decided to start selling Treasury bonds? And what would happen if the Fed’s appetite for government bonds were to be quenched?
Not much, it appears.
Estimates by the Treasury Department released this week indicated that over the 12 months through July, China reduced its position in Treasury securities by $165 billion, cutting them to $1.15 trillion despite making a small amount of purchases in July. And the Federal Reserve reported that, as of Wednesday, it owned $1.65 trillion in Treasury securities, $17 billion less than it had owned a year earlier.
The rates the Treasury is paying to borrow remain extraordinarily low.
That is partly because of the Fed, of course, but they would be much higher if investors were unwilling to lend money at rates as low as one-tenth of 1 percent, the current rate on three-month Treasury bills.
Standard & Poor’s may have taken away the country’s AAA rating, but there is still confidence that the United States will pay its bills. In Europe, by contrast, fears of government defaults — or currency devaluations if a country leaves the euro zone — have caused capital to flee across the Atlantic.
While the Fed has basically held its total Treasury holdings steady since the summer of 2011, their makeup has changed as the central bank bought more longer-term securities. A year ago, 10 percent of the holdings were in securities that would mature within a year. Now, that figure is close to zero. The proportion of securities with maturities over 10 years has almost doubled, to 23 percent.
The Fed hoped that would help to hold down longer-term interest rates, and perhaps provide economic stimulus.
China’s selling of Treasuries over the 12-month period was offset by the actions of Japan, another country whose trade surplus with the United States remains large. The Japanese are estimated to have increased their holdings by $232 billion over the 12 months, to $1.12 trillion. Those figures include both government and private holders of Treasuries.
Japan was the largest overseas holder of Treasuries until 2008, when it was passed by China. When China’s estimated holdings peaked last July, it held 48 percent more Treasuries than Japan. Now, that margin is down to 3 percent, and it could easily vanish in coming months.
July was the first month that the total Treasury debt issued to the public topped $10 trillion. Of that, 53 percent was held by overseas investors, 30 percent by American companies and investors, and the rest by the Fed.
That $10 trillion total is well below the number sometimes reported for the federal debt, which was almost $16 trillion at the end of July.
The larger figure includes money lent to the Treasury by other government agencies, principally the Social Security Administration.