Foreign purchases of U.S. debt rise

Government report shows that foreign investors have continued to buy up Treasurys, even as China expresses concern.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By David Goldman, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Foreign purchases of U.S. debt increased in the first month of 2009, according to a Treasury report released Monday, easing some concerns that overseas investors have lost their appetite for U.S. debt.

According to the Treasury International Capital (TIC) report released Monday, net foreign purchases of long-term Treasurys were $10.7 billion in January, down from a $15 billion rise in December. Still, the report relieved many investors' worries about the recently volatile TIC data, which showed foreign investors had sold a net $25.8 billion of Treasurys in November.

China continued to lead all foreign nations, buying up an additional $12.2 billion of Treasurys in January. Japan, the second largest U.S. debt holder, bought up another $8.8 billion of U.S. government bonds.

The Treasury has issued record amounts of debt to finance its expensive economic rescue efforts. But some investors have expressed concern that the huge increase in spending will drive inflation up and the value of their bond holdings lower.

Most notably, Chinese Premier Wen Jiabao said Friday he is concerned that the mammoth amounts of Treasury debt his country holds will deteriorate in value as the U.S. deficit increases. China owns nearly $740 billion of U.S. debt, more than 6% of the $10.9 trillion of U.S. debt outstanding, according to the TIC report.

"The Chinese are concerned about an unorderly unwinding of Treasury positions if the financial markets begin to recover," said Bill Larkin, portfolio manager at Cabot Money Management. "There are some signs that financial institutions may be better off than the market has been pricing in."

If stocks begin to recover, investors may look to sell off low-yielding government bonds in favor of stocks that have the potential for higher rewards. But as bond prices fall and yields rise, the value of Treasury holdings would fall.

Larkin said that an increase in yield to 4% from the current 3% level for the benchmark 10-year Treasury -- a realistic scenario -- would result in a 10% loss in value for the bond.

Still, the markets are so intermingled that foreign governments may simply be unable politically to unwind their U.S. holdings without facing repercussions from the United States.

"It has become a co-dependent system, so there may not be another option for [foreign holders of U.S. debt]," Larkin added.

On Saturday, President Obama said that the continued rise of foreign investments in U.S. Treasurys and other investments showed that government debt remains secure.

"I think that there's a reason why even in the midst of this economic crisis you've seen actual increases in investment flows here into the United States," Obama said. "I think it's a recognition that the stability not only of our economic system, but also our political system, is extraordinary."

Agency debt support lacking

The report, however, showed that foreign investors once again shunned U.S. agency bonds, which help mortgage finance giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) fund their purchases of U.S. mortgages. Foreign investors sold off a net $22.4 billion of agency debt in January, down from a $37.5 billion selloff in December.

Experts say foreign support has waned in recent months as the number of outstanding mortgages and amount of debt for sale fell.

"Foreign private investments have tapered off, but central banks' interest is holding its own - though it's certainly not growing," said Jim Vogel, head of agency debt research at FTN Financial.

Both companies have been forced to draw on the credit lines to fund continued mortgage purchases and guarantee activity. Freddie had already drawn down $14 billion of its credit line and last week asked the government for $30.8 billion in additional funding after posting a $23.9 billion loss in the fourth quarter.

Fannie Mae said last month it would draw down $15 billion of its own credit line after the company posted a $59 billion loss for 2008.

Still, some foreign interest in Fannie and Freddie bonds has helped the companies buy up home loans. Last week, Fannie successfully auctioned off $9 billion of agency debt. Though the vast amount of buyers were domestic investors, there was a decent amount of participation from Asian investors, according to Vogel. To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
The weapons of The Walking Dead Zombies are fiction, but the weapons on The Walking Dead are real. More
America's oldest workers: Why we refuse to retire! For these seniors, the best retirement is not to retire. From a 102-year-old Wal-Mart worker to an activist park ranger, these workers have stayed on the job well into their golden years. More
Why I'm protesting in Hong Kong Tens of thousands of protesters have flooded the streets of Hong Kong to demand open elections free from Beijing's influence. Eight protesters explain why they're taking a stand. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.