Investors' Thirst for U.S. Government Debt Is Yet to Be Quenched

We have been hearing warnings for years. Just wait until China stops buying our debt… the borrow and spend cycle in the U.S. will come to a grinding halt. Since the Obama Administration has already spent about $1.4 trillion (~$800 billion on stimulus and ~$600 billion on a down payment for healthcare reform), these calls are growing ever more prevalent.

Of course, China will continue to have excess cash reserves that need to be invested, and they only own a fraction — less than 10 percent — of the total U.S. debt outstanding (contrary to the widespread belief that they effectively own the United States), but it is not unreasonable to think demand would drop a bit as we continue to borrow money. The interesting thing, however, is that demand for U.S. debt is showing no signs of slowing down.

Part of the reason the stock market is doing so well (as of Thursday afternoon, Dow up 150 with less than one hour of trading left to go) is because we got the results of yet another U.S. debt auction and it went very well. The U.S. successfully sold $27 billion of seven-year notes with strong demand.

Demand can easily be gauged by what is called the “bid to cover ratio” which simply tells you how many dollars of bids were submitted for each dollar of debt that was auctioned off. Yesterday’s note offering registered a bid to cover of 2.82 so we received $76 billion of bids for only $27 billion of notes.

Are we paying through the nose for this money? Not exactly. The yield on the 10-year bond right now is around 3.5% or so. I wish I could borrow money for 10 years at 3.5%. Not only is the government trying to do so, but it is finding great success even in this fiscal environment. To me, that bodes well for the future of the United States.

Comments

[ggirard:]

It is indeed a source of comfort to know that when it comes to U.S. monetary policy, there is apparently no degree of outlandish debt accumulation, continued wreckless deficit spending on liberal boondoggles, and hostile gov't take-overs, that are capable of souring investor sentiment regarding the stability of the dollar. The U.S. is fortunate to have a clientele of bond purchasers (with the exception of China) willing to dismiss the commonly known projection indicating that U.S. debt payments will exceed tax receipts prior to the maturity of a 10-year bond issued in 2009.

But wait...

Could it be such a demand for U.S. bonds is the result of the U.S. buying up a substantial portion?

Jun 26 02:50 AM

[johngonole:]

Someone is buying thats for sure. It could also be the Fed right. Eitherway usually when a business has to borrow to meet capital requirements they rarely can get a good deal. Usually the more desperate you are the higher the rate you will pay. Not so with the US. They are desperate for dollars and people seem willing to give them the deal of a lifetime. I'm totally against deficit spending but I suppose if they are going to borrow now isn't a bad time.

I just hope that by the time interest rates hit 5% for the govt they stop all this borrowing. Fat chance!

Jun 26 03:00 AM

[China Expert:]

Let simply monetize all the government debt and then have the FED move the decimal point over two places to the left on their balance sheet. No one will notice and problem solved (for today) !

Jun 26 07:29 AM

[popey:]

The problem is no-one knows who is buying the bonds. Foreign central banks may be sponsored by Ben himself. The whole bidding process is opaque and clandestine and, indeed, dark. The whole house of cards is ready to collapse when this interbank garbage is exposed.

Jun 26 10:29 AM

[nobby73:]

I didn't believe what they were saying about indirect bids proving strong foreign central bank interest and I don't believe the bid cover ratio either, you can easily submit a silly level, knowing you won't get filled...

Jun 26 02:37 PM

[alexander0000:]

the Fed has been buying US treasuries in a separate facility ie not at refunding auctions. not only are they not buying at the refunding auctions, the Fed is not really buying a lot - $300bn over 6 months. the last 2 months refundings amounted to $200bn by themselves and total will be about $1tr this year. so the answer is 'no, the Fed is not buying these bonds'.

the Fed has a balance sheet. if you want to know what they are buying or selling, just look at it each week and compare to the last. it is all very easy to cast baseless suspicion on government numbers, as if someone just makes them up, but does anyone have anything to back that up? i am guessing not.

Jun 26 03:42 PM

[nobby73:]

Derivatives aren't on balance sheet, so we can neither prove nor refute. Clearly nobody would be so stupid as to actually buy the bonds and publish the fact. And for completeness, when did they last audit the Fed?


On Jun 26 03:42 PM alexander0000 wrote:

> the Fed has been buying US treasuries in a separate facility ie not
> at refunding auctions. not only are they not buying at the refunding
> auctions, the Fed is not really buying a lot - $300bn over 6 months.
> the last 2 months refundings amounted to $200bn by themselves and
> total will be about $1tr this year. so the answer is 'no, the Fed
> is not buying these bonds'.
>
> the Fed has a balance sheet. if you want to know what they are buying
> or selling, just look at it each week and compare to the last. it
> is all very easy to cast baseless suspicion on government numbers,
> as if someone just makes them up, but does anyone have anything to
> back that up? i am guessing not.

Jun 26 05:25 PM

[pdub271:]

3.5% ? I guess the current crappy interest rates (and some good old fashion fear) are playing a role. But 3.5% won't even keep up with inflation, if Greenspan and half of SA are right about bad inflation in 2012 and beyond.

Jun 26 07:24 PM