Interest Rate Roundup

Thursday, January 08, 2009

New York Times: China interest in U.S. debt drying up?

I talked about the possibility of foreign creditors getting more reluctant to fund U.S. profligacy. Today, it's front page news on the New York Times' web site. More below:

"China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.

"The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time.

"On Tuesday, President-elect Barack Obama predicted the possibility of trillion-dollar deficits “for years to come,” even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasuries, which are government i.o.u.’s.

"In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.

"But now Beijing is seeking to pay for its own $600 billion stimulus — just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects.

“All the key drivers of China’s Treasury purchases are disappearing — there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates,” said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland."

If you didn't already know, Germany had a hard time auctioning off 10-year bonds this week. Will this be the start of a trend? We'll see ...

UPDATE: In all fairness, today's 10-year note auction went well here in the U.S. The $16 billion in notes were sold at a yield of 2.42%, below forecasts for 2.47%. The bid-to-cover ratio came in at 2.59, up from 2.44 at the mid-December auction and the highest since August.


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