16 September 2009
Even as Fiscal Deficit Widens, U.S. Can Still Sell Treasuries
U.S. government’s taxing power makes its debt a secure investment
Washington — While the federal budget deficit is projected to reach an unprecedented $1.6 trillion this year, the U.S. government will still be able to raise funds to cover the revenue gap by selling Treasury securities, which continue to easily attract buyers domestically and around the world, analysts say.
“Despite the recession, the U.S. economy is still the biggest and most powerful in the world, and ultimately U.S. government debt is backed by the taxing power of the U.S. government,” said Chris Edwards, director of tax policy studies at the Cato Institute, a Washington-based policy research group. “It is an awesome power to be able to tax the biggest and most prosperous economy in the world. So that is why the Treasury securities are extremely secure.”
The Treasury Department sells the Treasuries at auctions. The best known is the Treasury bill, or “T-bill,” which has a maturity of less than one year. Treasury notes mature in two to 10 years and Treasury bonds are for 20 to 30 years. Treasuries are heavily traded on financial markets.
The value of U.S. Treasuries owned by overseas investors has increased. As of July, those investors owned $3.428 trillion in Treasuries, $804 billion more than in June 2008. The July 2009 total is about 46.7 percent of the U.S. publicly held debt, which was $7.33 trillion at the end of that month, according to the Bureau of Public Debt.
China and Japan, which held $800.5 billion and $724.5 billion, respectively, as of July, were the biggest overseas investors, according to the Treasury Department and Federal Reserve. Both countries increased their holdings during the preceding 12 months.
“In places like China, there are less domestic investment opportunities, less safe investment opportunities,” Edwards said. Japan and China have among the highest saving rates in the world. In both countries, the purchasers of Treasuries include private investors and official entities, such as the central banks.
This chart shows the major overseas holders of U.S. Treasury securities and the amount of their holdings as of June.
“There is really no place to put money that is so secure,” said Peter Morici, a business professor at the University of Maryland and former chief economist at the U.S. International Trade Commission. He predicted that overseas investors — particularly in China, Japan and Middle East countries — will further increase their Treasuries holdings.
The globalization of financial markets has facilitated the increased U.S. government borrowing, Edwards said. “International debt markets in particular are tightly coordinated and global, and that means that the U.S. government can raise money from savers globally at a pretty cheap cost,” he said. “We’re able to borrow a lot more now, so politicians do borrow a lot more.”
Internationally, there is no other investment bond or note that has the reputation of the U.S.-dollar-denominated Treasuries, Edwards said. In time, the euro will take its place alongside the U.S. dollar as a reserve currency, but not yet, he said. Gold also has its place, but its impact is small compared to the U.S. dollar, he added.
