New York: For the moment, financing the US budget deficit may be getting less arduous as foreign investors now own a record 80% or $672 billion (Rs26.88 trillion) of the $835.4 billion treasuries due in three to 10 years, according to research by Lawrence Dyer, a New York-based strategist at HSBC Securities USA Inc., the investment banking arm of HSBC Holdings Plc. in London.
Not since the 19th century, when state and corporate bonds for the construction of railroads, canals and highways were purchased by Europeans, have foreigners held so much American debt, said Alan Taylor, a professor of economic history at the University of California, Davis.
While the Central Bank of China in Taipei and the Bank of Korea say they have had their fill of treasuries, the 22% rise in US dollar reserves led by Brazil and China during the past year makes treasuries irresistible. Yields on US government bills, notes and bonds are higher than similar maturity debt sold by Japan and the countries sharing the euro. That’s partly why foreign holdings of US securities have doubled since 2002.
“Those dollars need to go somewhere and the natural place to go to is treasuries,” said Charles Comiskey, the New York-based head of US government bond trading at HSBC, Europe’s largest bank by market value. “They’re not bought for fundamental reasons but for necessity.”
Yields on 10-year notes, the benchmark for corporate bonds and 30-year fixed-rate mortgages, have climbed for three straight weeks. They increased 2 basis points on Tuesday to 4.89%.
Senatorspeak: Senator Hillary Clinton in February expressed concern over foreign ownership of “nearly half” the US debt
The price of 4.5% notes maturing in May 2017 fell about 6/32 on Tuesday, or $1.88 per $1,000 face amount, to 97.
American long-term interest rates would be about 1.5 percentage points higher without foreign capital flowing into the $4.4 trillion of outstanding treasuries, according to a 2005 Federal Reserve study by Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville. The US department of the treasury says non-Americans hold at least 52% of all notes and bonds.
Lower treasury yields help keep down borrowing costs for companies and US home buyers. The yield on US corporate bonds was 5.82% last week, compared with a 10-year average of 6.05%, according to data compiled by Merrill Lynch & Co. Rates on 30-year mortgages rose 16 basis points last week to 6.37%, down from 7.94% in May 1997 and the average 6.70% over the past decade, data from government-chartered mortgage company, Freddie Mac, show.
Senator Hillary Clinton, a New York Democrat running for president, said in a 28 February letter to treasury secretary Henry Paulson and Fed Chairman Ben S. Bernanke that foreign ownership of “nearly half” the US debt was “a source of great vulnerability.” The economy “can too easily be held hostage to the economic decisions being made in Beijing, Shanghai and Tokyo.”
Clinton backed legislation calling on the administration to respond when foreign ownership of treasuries reaches the equivalent of 25% of gross domestic product. The $2.19 trillion of government debt held abroad was equivalent to 16% of the $13.6 trillion GDP as of 31 March.
The deficit as a percentage of GDP peaked at 5.2% in 1983, and declined to 1.6% in 2006. This year, the deficit probably will shrink to 1.5% of the economy, according to the Congressional Budget Office.
Central banks, whose currency reserves swelled to $5.4 trillion this year, are buying treasuries with dollars accumulated from exports of goods and oil to America. Foreigners owned less than 35% of treasuries in 2000. Crude prices have tripled during the same period. The percentage owned internationally may increase as the US budget deficit shrinks and bond sales decline, said William O’Donnell, head of US government bond strategy at UBS Securities LLC in Stamford, Connecticut.
Government auctions of notes and bonds will drop 51% in the fiscal year ending September, according to the treasury department. That excludes sales of bills and inflation-protected securities.
Outstanding treasury debt was concentrated in bills, accounting for 21.4%, and two- and three-year notes, making up 21.5%, as of September. The government has been reducing sales of securities due in 10 years or less relative to longer-term debt and inflation-protected notes.
Central banks, including the People’s Bank of China, have said they plan to increase investments in bonds other than treasuries, adding to concerns that waning demand would push up US market rates.
Japan, the biggest foreign holder of treasuries, with $612 billion, has reduced investments in US government bonds this year, from $623 billion. The country doesn’t plan to “drastically” cut US assets, vice-finance minister Hideto Fujii said last week.
International investors “can’t keep buying safe, simple treasuries forever,” said HSBC’s Dyer, who based his estimates on June 2006 treasury data. Foreigners are “reaching a limit.”
At the same time, treasuries are becoming more attractive to foreign investors as yields on emerging market debt and non-investment grade corporate securities approach record lows compared with government bonds, said O’Donnell.
Speculative-grade corporate bonds yielded an average 2.44 percentage points more than treasuries last week, matching the record low in 1997, according to Merrill Lynch & Co., which started collecting the data in 1986. The average yield premium on emerging market debt narrowed to 1.49 percentage points, the smallest since JPMorgan Chase & Co. began collecting such data in 1997.
Treasuries due in 10 years yield 48 basis points, or 0.48 percentage point, more than German 10-year bonds, down from 116 basis points a year ago. The US notes yield 314 basis points more than Japanese 10-year bonds, little changed from 317 this time last year.
Central bank efforts to diversify reflect the growth of reserves more than the desire to hold less US debt. China’s swelled in the first quarter by a record $136 billion to $1.2 trillion, prompting the government to set up a group to pursue other investments. China last week bought a $3 billion stake in Blackstone Group LP, the New York-based private-equity firm led by Stephen Schwarzman.
China more than doubled its holdings of treasuries in the three years ended 31 March to $420 billion, according to US government data. Members of the Organization of Petroleum Exporting Countries did the same, increasing their investments to $113 billion. Brazil now owns $70.6 billion of US government debt, up fivefold since 2004.
Central banks used their growing reserves to purchase a net $284.5 billion of so-called agency debt sold by government-chartered firms Fannie Mae, Washington and Freddie Mac in McLean, Virginia last year. They bought a net $485.2 billion of corporate bonds.
“At the end of the day, you are still holding onto a lot of dollar-denominated assets,” said Chia Liang Lian, a former economist at the Monetary Authority of Singapore who oversees about $10 billion of Asian assets for Pacific Investment Management Co. in Singapore. Pimco is a unit of Munich-based Allianz SE.
(Christina Soon in Beijing, Mayumi Otsuma and Kyoko Shimodoi in Tokyo, Jake Lee and Cathy Chan in Hong Kong contributed to this story