NEW YORK (Dow Jones)--As China, a major creditor to the U.S., slowed its pace of Treasury securities purchases last year, other countries stepped up to the plate, helping to keep U.S. borrowing costs in check across the economy.
Steady demand from foreign investors helped the U.S. sell a record $2.1 trillion in Treasury notes and bonds in 2009 without pushing yields sharply higher. Rising yields raise the cost of borrowing not just for the U.S. government, but also for consumers and businesses as Treasury rates are the benchmark for mortgages and other types of loans. The 10-year Treasury yield, which moves inversely to prices, was at 3.8% Thursday afternoon.
China increased its holdings by just $28 billion in 2009, according to capital flows data from the Treasury. That increase pales in comparison with increases recorded by Japan, the U.K., Canada and Brazil. Even Hong Kong, part of China but administrated separately with a separate currency, boosted its stock of Treasurys by $75.5 billion in 2009.
With an increase of $142.8 billion last year, Japan reclaimed the spot as the biggest foreign holder of Treasurys, after ceding the title to China in late 2008. Japan held $768.8 billion of Treasurys by end-2009, compared with China's $755.4 billion.
China's Treasury holdings peaked at $800.5 billion in July 2009 as it allowed Treasurys that mature in a year or less, known as T-bills, to run off and reinvested only part of the funds in Treasury notes and bonds.
"China's buying patterns have definitely changed since early 2009," said Rachel Ziemba, a senior research analyst in New York at Roubini Global Economics. But she cautioned the Treasury's capital flows data, released with a two-month lag, may underestimate buying by China which could have used intermediaries in the U.K.
Still, signs that foreign appetite overall remains strong for Treasurys bode well for the Treasury Department, which is expected by some economists to sell another $2 trillion in debt this year.
The demand reflects woes elsewhere, particularly in the euro zone, where concerns over the fiscal problems of highly indebted nations likely encouraged foreign central banks to park cash in the Treasury market, one of the world's most liquid financial assets. Foreign demand in Treasury auctions earlier this month was above recent averages as investors sought shelter in Treasurys.
There are "no other markets large enough to absorb the demand from China and Japan than the U.S., the U.K. and the euro zone. And based upon the outlook for these three [regions], parking your money in the U.S. may be the safest," said Kathy Lien, director of currency research at Global Forex Trading in New York, who monitors foreign capital flows into the U.S.
Lien said that with sovereign debt worries escalating in January, China might have stepped up its Treasury purchases again at the start of 2010.
Many foreign central banks in export-led countries also need to keep buying Treasurys as a way to prop up the U.S. dollar against local currencies to protect their export sectors.
But with recent evidence that the recovery is strengthening in the U.S. and the Federal Reserve is moving to withdraw monetary stimulus, yields will have to rise to attract buyers. Investors will demand higher yields to protect their fixed returns against a rise in inflation, particularly if the Fed mistimes its exit or the government fails to cut its trillion-dollar-plus deficits.
Stephen Jen, managing director of macroeconomics and currencies at hedge fund BlueGold Capital Management LLP in London, said demand will be "adequate" for Treasurys, both from U.S. banks and foreign investors, but yields on long-dated Treasurys should "drift higher into the year, as growth and inflation recover."
http://online.wsj.com/article/BT-CO-20100218-714471.html?mod=WSJ_latestheadlinesInflation is still a question mark, as both the US and Japan core CPI are trending down, not up.
