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Why Would China and Japan Stop Buying Our Debt?

Posted by Larry Doyle on February 17, 2010 12:19 PM |

Our wizards in Washington should not be so naive to think foreign buyers, especially from Asia, will continue to finance our debt at current rates and at current levels. News yesterday that China is no longer the largest holder of our Treasury debt should not be discounted.

What are the ramifications for our nation if China and other foreign buyers decline to purchase our debt or – even worse – actually start selling even more of their current holdings? A quick and violent move higher in our domestic interest rates.

Don’t think it could happen? Think again.

What worries these foreign buyers? Well, what has brought Greece to its knees? Massive fiscal debt.

The Wall Street Journal sheds light on this concern in writing, Japan’s Treasury Support May Not Last:

Many Japanese investors are now worried about the fiscal health of the U.S. They also face the risk that the dollar will weaken against the yen, reducing the value of their holdings in yen terms.

“Fears are growing that the U.S. fiscal health will worsen further as [President Barack] Obama hasn’t been able to offer details on how to rebuild government finances,” Mr. Nishida said. “Many now expect the U.S. government won’t cut public spending or raise taxes ahead of November’s midterm elections.”

They also worry about the near certainty that the U.S. Federal Reserve will tighten monetary policy sooner than Japan’s central bank, which could lead to a drop in bond pricing.

“The Fed is clearly inching toward tightening,” said Mizuho Securities’ Mr. Shimominami. “Risks are high that U.S. mid- to long-term yields will rise.”

Some economists said China’s selling was cause for modest concern but noted it occurred before the recent sovereign-debt worries in Europe, prompted by fiscally strapped Greece and concerns over the pace of the global economic recovery. Those concerns have pounded the euro and driven many investors back into the relative safety of U.S. Treasury debt.

Most assuredly, risks are high. Are investors being properly rewarded for these risks at current levels? With the 2yr Treasury note yielding .83% and the 10yr note yielding 3.70%, I do not think investors are properly rewarded. Why are rates so low? The Federal Reserve’s quantitative easing program has kept interest rates much lower than they otherwise would be. That program terminates at the end of March.

I repeat my question: are investors properly rewarded at current rate levels for the risks taken?

Sense on Cents believes not.


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