East Coast Economics

Wanted: Treasury Buyers

with one comment

The Fed has pledged to step in and buy Treasuries if necessary in order to keep long-term yields down to make credit affordable, resuscitate the housing market and support consumer spending.  But as issuance is increasing and foreign demand for Treasuries decreasing, will the Fed be in the position to purchase Treasuries in a sufficient volume to keep rates down?

  • The 2009 deficit is expected to top $1.2 trillion – almost three times larger than the previous record at $440b in fiscal 2008.
  • China, which accounts for ~25% of foreign (and >5% of overall) Treasury ownership, shows decreasing interest in US government debt: its foreign reserves were reported as shrinking in December ’08 and are expected to increase by only $177b this year compared to $415b last year.

Is the Fed going to be able to keep yields at their compressed levels for an extended period of time? I’m not convinced.



Written by eastcoasteconomics

January 14, 2009 at 8:39 pm

One Response

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  1. The decline in Chinese purchases of U.S. government bonds will be counterbalanced by an increase in domestic U.S. purchases. The fall in Chinese exports is caused in part by an increase in domestic U.S. saving. That saving has to go someplace, and a lot of it will go into Treasuries. The same is true of the entire developed world: savings rates are going up, and the U.S. will get at least its fair share of that saving. I can’t guarantee that the increase in domestic saving will exactly balance the fall in Chinese demand for Treasuries, but you can’t look at one without looking at the other.

    Chinese demand may not fall as much as most people fear, either. Everything I know on that topic is from Brad Setser, so I won’t try to summarize it here.

    James Kwak

    January 22, 2009 at 10:20 am

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