A record drop in foreign holdings of US Treasury bills in December sent a reminder that the US government might have to pay higher interest rates on its debt to continue to attract investors.
China reduced its stake and lost the position it held for more than a year as the largest foreign holder of Treasury debt. Japan retook the top spot as it boosted its Treasury holdings.
The Treasury Department said foreign holdings of US Treasury bills fell by a record US$53 billion in December. That topped the previous record drop of US$44.5 billion last April.
Private analysts, though, were split over the significance of the decline. Some doubted that the drop in foreign holdings of short-term Treasuries signified growing unease about holding US debt. They noted that net purchases of longer-term Treasury debt rose in December by US$70 billion.
But other economists saw the decline as a warning signal. They fear that other countries, especially China, have begun to worry about record-high US budget deficits and are looking to diversify their holdings.
A sustained drop in foreign demand for US dollar-denominated assets could lead to higher US interest rates and falling stock prices.
Those trends could threaten the US recovery, but economists said they see no such evidence yet.
The Treasury report showed that China reduced its holdings of Treasury securities by US$34.2 billion in December.
Alan Meltzer, economics professor at Carnegie Mellon University, said China’s shift should be a wake-up call for Washington.
“The Chinese are worried that we have unsustainable debt levels, and we do not have a policy for dealing with it,” Meltzer said.
He said the Chinese worry that confidence in the US government’s ability to repay its debt could erode. That would cause the value of Treasurys and the US dollar to fall — and lead to losses on Beijing’s’ US debt holdings.
The administration of US President Barack Obama released a budget plan on Feb. 1 that projects the deficit for this year will total a record US$1.56 trillion. That would surpass last year’s record of US$1.4 trillion deficit.
Some private economists warned against reading too much into December’s drop in foreign purchases of short-term Treasury debt.
They said that the figures are volatile from month to month. They also pointed out that Europe’s debt crisis has put pressure on the euro and boosted demand for US Treasurys and the US dollar.
“China may not be too happy with us right now, but you have to ask, what else are they going to do with their money?” said David Wyss, chief economist at Standard & Poor’s in New York.
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