Even with all the concern about the so-called fiscal cliff, another confrontation over government borrowing limits and Chinese ownership of US debt, foreign investors cannot get enough US Treasuries.
Taiwan, Brazil, Belgium, Luxembourg, Russia, Switzerland and Hong Kong boosted their holdings of US government securities by a collective US$264.8 billion since the last debt ceiling debate ended in August last year, Treasury data released on Friday show. The purchases more than made up for the US$123 billion decline in Treasuries owned by China, the US’ biggest overseas creditor, to US$1.156 trillion.
The rise in international ownership shows growing confidence in the US, while China’s reduced stake undermines Republican assertions that the nation has gained too much influence. US President Barack Obama and congressional leaders agreed on Friday to begin talks on a long-term fiscal plan to avert more than US$600 billion in mandated spending cuts and tax increases scheduled to begin on Jan. 1 that threaten the recovery.
“Despite our fiscal situation, despite all these issues, there hasn’t been much of a buyers’ strike from the Treasury’s perspective,” Aaron Kohli, an interest-rate strategist at BNP Paribas in New York, one of 21 primary dealers that trade with the US Federal Reserve, said in a telephone interview on Tuesday last week. “One has been replaced by the other and that really does demonstrate the depth of demand.”
BNP forecasts the 10-year yield will rise to 2 percent by June next year, keeping it below the average of about 5 percent since 1990. The benchmark 10-year note’s yield fell 2.5 basis points last week, or 0.025 percentage point, to 1.58 percent, according to Bloomberg Bond Trader prices.
Democratic Senate Majority Leader Harry Reid and Republican Speaker of the US House of Representatives John Boehner said the first meeting between the parties and Obama suggested progress was possible.
Treasuries have returned 2.8 percent this year and 1 percent since the election on Nov. 6, according to Bank of America Merrill Lynch bond indices. After Obama’s re-election, the Standard & Poor’s 500 Stock Index has declined 4.6 percent, while the US Dollar Index, which measures the currency against six of the US’ major trading partners, has risen 0.6 percent.
Chinese ownership of US debt was an issue during the election battle.
“Does the America we want borrow a trillion dollars from China? No,” Republican candidate Mitt Romney said on Aug. 30 in accepting the Republican presidential nomination at the party’s convention in Tampa, Florida.
A super-political action committee, the Americans for Prosperity Foundation, joined with the advocacy group Citizens Against Government Waste to air television advertisements that showed China’s ownership of Treasuries as a threat to US independence.
“America tried to spend and tax itself out of a great recession” and saddled itself with “crushing debt,” a Chinese professor in the future tells his students as English subtitles appear on the screen. “Of course we owned most of their debt, so now they work for us.”