The Safety of U.S. Treasuries

Robert Hsu, March 19, 2009

Nowadays, everyone is worried about finances. From next month's bills to the security of a nest egg, people around the world are concerned about the state of their finances. And it's not limited to individual people, either–businesses, corporations and entire governments are worried about their investments, and what the future holds.

In fact, China expressed its concerned last week. China is heavily invested in U.S. Treasury securities. These securities are one of the safest investments that the U.S. financial system has to offer. The are also one of the safest investments in the world. However, considering the financial and economic problems that the U.S. is facing, China is becoming increasingly worried about its investments in U.S. treasuries.

Chinese Premier Wen Jiabao asked the U.S. about these investments, and wanted assurance that they were in fact safe. The U.S. government responded with confidence about the treasuries. Also, it reiterated its goal to cut the budget deficit in half in four years.

I agree with the U.S. in that U.S. Treasury market remains the safest and most liquid market in the world. Holding $696 billion in U.S. Treasury debt as of December 31, 2008, China is the biggest U.S. debt holder. China's purchases of American debt have been one of the few factors supporting the global economy.

I know the Chinese are worried, and a positive relationship between the U.S. and China is crucial to the recovery of the U.S. economy. President Barack Obama is relying on China to sustain buying of Treasuries to fund his $787 billion stimulus package. U.S. And Secretary of State Hillary Clinton, while visiting officials in Beijing recently, urged China to continue buying U.S. debt. According to U.S. Treasury data, Chinese government increased its holdings by 46% last year, and the U.S. government hopes that China will invest more this year. So it is good that the U.S. is focused on keeping relations strong and reassuring the Chinese.

Unfortunately, I think the U.S. Treasury market is showing some bubble-like signs after rallying 14% in 2008. Yields on benchmark 10-year notes are less than 3% now, and as the government will continue to print more money, Treasuries will decline for sure. This will lead to higher yields.

Whether China will increase its holdings of U.S. Treasuries is yet to be seen. This plays important part in supporting the U.S. economy, so I will continue to watch this situation and let you know in China Strategy if China changes its stance. Join China Strategy today!

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