Who Will Be The Last One Left Holding U.S. Bonds?

Includes: DTYL, TLT
by: Katchum

These days, we hear much talk about how low the interest rates are on U.S. government bonds (TLT, DTYL). Many say that this is because the Federal Reserve is printing money to buy up its own bonds. But actually, it's the foreigners that are buying up all the treasury debt.

From CNBC, we got the major holders of U.S. debt at the end of 2011. They are listed below:

1. Social Security Trust Fund: $US 2.67 trillion

2. U.S. Federal Reserve: $US 1.659 trillion

3. China: $US 1.169 trillion

4. Savings Bonds & Other Investors: $US 1.102 trillion

5. Japan: $US 1.083 trillion

6. Pension Funds: $US 903.4 billion

7. Mutual Funds: $US 797.9 billion

8. State and Local Governments: $US 444.6 billion

9. Medicare Trust Funds: $US 324.57 billion

10. Depository Institutions: $US 286.3 billion

11. Oil Exporters: $US 254.5 billion

12. Insurance Companies: $US 253.7 billion

13. Brazil: $US 237.4 billion

14. Caribbean Banking Centers: $US 224.8 billion

15. Taiwan: $US 184.4 billion

The above = Total of $US 11.6 trillion of the entire $US 15.7 trillion public debt.

Foreign holders of U.S. debt are given in this table 1:

Click to enlarge

Table 1: Major Holders of U.S. Treasury Securities

We can see that over the past few months, foreigners have been buying more and more debt. Foreign holdings have risen from $US 4477.6 billion in March 2011 to $US 5117.6 billion currently. The rest of the debt is held by the United States. In March 2011, total U.S. public debt was $US 14.2 trillion, currently it's $US 15.7 trillion.

So over the course of one year, the U.S. hasn't accumulated much of its own debt in percentage terms. From 68% ((14.2-4.4776)/14.2) in March 2011 it fell to 67% ((15.7-5.1176)/15.7) in March 2012.

When we look at a longer period (November 2007), we have $US 9.1 trillion of total debt, of which $US 2.3 trillion is held by foreigners. Which leaves 9.1 - 2.3 = 6.8 trillion, held by the U.S. So 6.8/9.1 = 75% is held by the U.S.

It's safe to conclude that over the course of the years, foreigners have accumulated larger percentages of U.S. debt. You could say that foreigners are subsidizing the United States.

I have done the calculation on other time stamps using these sites (Foreign Treasury Holdings and Total Public Debt):

Nov 2007: 75% held by U.S.

Mar 2008: 73% held by U.S.

Nov 2008: 71% held by U.S.

March 2009: 70% held by U.S.

March 2010: 69% held by U.S.

March 2011: 68% held by U.S.

March 2012: 67% held by U.S.

I came up with this short-term chart which indicates that foreigners are still accumulating massive amounts of U.S. debt.

Chart 1: Debt Held by U.S.

It doesn't look like foreign interest will go away. If we look at 1970 till 2010, we get this picture (chart 2): In 1970, only 5% of the federal debt was held by foreigners. Now it has skyrocketed to 33% in March 2012. Such a chart can't keep going up forever. If the markets start to realize that the U.S. debt won't be paid back or feel that the interest payments on the U.S. debt are unsustainable, then the bond market will fall apart.

On that day, foreigners will back away from buying U.S. treasuries and that will leave the Federal Reserve buying its own treasuries by debasing the U.S. dollar as it tries to put a lid on rising interest rates. I highly recommend you to watch this seminar by Peter Schiff at the Fraser Institute in Vancouver, where he explains in detail how the bond market will collapse.

So it is important to keep watching Chart 2 to see the tipping point. Once this trend starts to reverse downwards, the bear market in bonds and the U.S. dollar will start. So investors who are holding treasuries need to be aware of this to know when to sell.

Chart 2: Debt held by Foreigners

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.