Now What ? Back-Up Plan B Or C

Posted By on February 18, 2010

WASHINGTON (AP) – The government said Tuesday that foreign demand for US Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.

The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits.

The Treasury Department reported that foreign holdings of US Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5 billion drop in April 2009.

The big drop in China’s holdings meant that it lost the top spot in terms of foreign ownership of US Treasuries, dropping to second place behind Japan.

Japan also reduced its holdings of US Treasuries, cutting them by $11.5 billion to $768.8 billion in December, but that amount was still more than China’s December total of $755.4 billion.

The $53 billion decline in holdings of Treasury securities came primarily from a drop in official government holdings, which fell by $52.3 billion. The holdings of foreign private investors fell by $700 million during the month of December.

For all of 2009, foreign holdings of US Treasuries dipped by $500 million. In 2008, foreigners had increased their holdings of US Treasuries by $456 billion as a global financial crisis triggered a flight to the safety of US government debt.

Let’s see, China is cutting back on US debt purchases. So is Japan. And so are the big bond funds, such as PIMCO, the biggest in the world. Who will buy US bonds? Where will the US get the money it needs to squander on wars for the young and pills for the old?

Chris Hunter, who runs the research department at our family office, says the number of potential buyers is getting dangerously low…to the point where an auction of Treasury debt could fail for lack of interest.

What this seems to mean…on the surface…is that treasury yields will rise. Less demand. More supply. Prices fall. Yields rise. In fact, that is what seemed to be underway yesterday. Prices on 30-year Treasury debt fell.

If yields rise significantly you can say goodbye to any hope of a recovery. Rising yields make it harder for investors and businesses to make money. New projects will be cancelled; new workers will be fired even before they are hired, and investors will move their money out of investments that are ‘risky.’

Especially hard hit will be Japan.

From ….Bill Booner of

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