Why is China loading up on US Treasuries? At first glance that seems strange because the dollar keeps falling. Doesn't a falling dollar mean that inflation is on the way? Not necessarily. The Labor Department reported that prices of imported goods fell 15% in August from a year ago, this after a 19.2% drop in July. These numbers are telling us that there is no inflation coming in the near future. The Fed has plenty of wiggle room. It can afford to keep interest rates at historic lows.
So then why is the dollar weak? We know what the answer is. The Fed has pledged $12 trillion dollars to bail out the bankers, housing and the mortgage market, just to name a few areas where the money is going. Then too, we have sky high deficits. The current account deficit will rise to 3.2% of GDP in 2010 and 3.5% in 2011.
Now in spite of this contrary information, the Chinese and other international investors still see US Treasuries as the best investment in this troubled world. We should also point out that foreign governments have no choice than to buy Treasuries since the US dollar accounts for 65% of world currency. Let's look at the numbers:
- Investors outside the US bought 43.1% of the $1.41 billion of US treasuries this year compared with 27.1% of $527 billion at this point in 2008
- China is the biggest foreign owner of US Treasuries amounting to $800.5 billion, up 3.1%
- Indirect bidders (includes foreign central banks) bought 49.4% of two year notes up from 33% in July. They purchased 56.4% of five year notes compared with 36.7% in July and 61.2% of seven year notes, up from 43.7%
- In this country Bill Gross of Pimco raised his allocation of Treasuries to 44% from 25% in July.
So to summarize, the US Treasury market is enjoying a "sweet spot" with the help of increased foreign buying. This is helping the Fed to finance our huge US deficit, notwithstanding a falling dollar.
Just a tip. As a rule of thumb, your percentage of notes and bonds should equal your age. If you are 40 years old, 40% of your investments should be in fixed income securities.
Would you buy bonds at these levels?
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Reader Comments (Page 1 of 1)
9-21-2009 @ 5:12PM
Beltway Greg said...
Own fixed income? The day I buy a bond is the day they wheel me off to a home. If you can't find a beaten up value stock or a utility sporting a hefty dividend it's time to pack it in and load up on them ETFs.
9-21-2009 @ 5:24PM
clikdawg said...
Sure -- the U.S. is "too big to fail"; therefore the rest of the world will continue to enable our irresponsible behavior the same way the Gummint continues to enable the irresponsible behavior of its financial institutions.
Problem solved -- if you believe that irresponsible behavior on such an enormous scale can be sustained indefinitely without crippling repercussions in our own society and that of the world at large; that corruption as the only financial constant can produce global health; and that The Bubble is the ultimate financial instrument for the creation of real wealth -- the culmination of thousands of years of fiscal theory, beyond which monetary practice need not (indeed, cannot) progress.
In short, that The Piper need NEVER be paid.
Good luck wid dat, Sports Fans ...
9-21-2009 @ 6:48PM
brian said...
Does anyone else smell horse$hit?
9-21-2009 @ 8:17PM
Iridium said...
Usually if import costs fall by that amount you would get a reduction in price to the consumer, instead the consumer has seen 6-10% inflation during the recession.
The consumer has seen a huge reduction is prices due to massive sales to clear inventory but overall costs have gone up. When you have a 19% decrease in the cost to buy goods from overseas and the consumer sees inflation there is only one answer.
Massive corporations are using the decrease in importation costs to bolster balance sheets and increase the bottom line without passing the costs on to consumers. Coupled with massive labor reductions this has allowed corporations to meet or surpass earnings without increasing sales.
All of this is bad for the consumer and bad for earnings worldwide. You can't cut your way to growth forever.
9-22-2009 @ 9:00AM
John W. Taylor said...
I have to agree with clikdawg, our deficit spending is just perpetuating irresponsible behavior. Inflation is going to be a huge problem and the ultimate price that we will all have to pay for all of the irresponsible borrowing, both in the private and public sector.
What is the Fed going to be able to do about inflation? We can barely get the housing and the economy going at 0% rates. What is going to happen if the Fed tries to mitigate inflation by driving rates up to 10%, 15%, 20%? It won't be pretty.
And, China is buying our debt mainly as a power play. If they stop buying, our deficit spending will have to come to a stop. If we can't live within our means, who is calling the shots?
9-22-2009 @ 9:50AM
ebrandler34 said...
"Investors outside the US bought 43.1% of the $1.41 billion of US treasuries this year compared with 27.1% of $527 billion at this point in 2008"
I think the author meant "trillion" for the U.S. Treasuries this year. Ta-Ta-Ta-Ta-Tra-illions.
So the U.S. government has issued 3 times as much debt in 2009 as 2008, but that's not going to be any problem, right?
Billion, Trillion, Ba-zillion ... what's it matter anyway? It's only paper.