Foreign demand for Treasuries drops; rates could rise

Posted 2h 15m ago
By Martin Crutsinger, AP Economics Writer

WASHINGTON — The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.

The reductions, if they continue, could force the government to make higher interest payments at a time when it is running record federal deficits.

The Treasury Department reported that foreign holdings of U.S. Treasury securities fell by $53 billion in December, surpassing the previous record $44.5 billion drop in April 2009.

The big drop in China's holdings means it lost the top spot in foreign ownership of U.S. Treasuries, dropping to second place behind Japan.

Japan also reduced its holdings, cutting them $11.5 billion to $768.8 billion in December, but the total was still more than China's December total of $755.4 billion.

The $53 billion decline in holdings of Treasury securities came primarily from a drop in official government holdings, which fell $52.3 billion. Holdings of foreign private investors fell by $700 million during the month of December.

For all 2009, foreign holdings of U.S. Treasuries dipped $500 million. In 2008, foreigners had increased their holdings of U.S. Treasuries by $456 billion as a global financial crisis triggered a flight to the safety of U.S. government debt.

That flight to safety had driven down the interest rates the government was having to pay on its debt to record lows. Rates on some short-term securities dipped into negative territory for brief periods.

The Obama administration on Feb. 1 released a new budget plan that projects the deficit for this year will total a record $1.56 trillion, surpassing last year's record $1.4 trillion deficit. The trillion-dollar-plus deficits have been caused by a deep recession, which has reduced government tax receipts, and massive spending to jump-start the economy and stabilize the financial system.

The administration has pledged to begin addressing the deficits. Obama has said he will soon appoint a commission to recommend ways to trim the debt.

Overall, the Treasury Department said foreign net purchases of long-term securities totalted $63.3 billion in December, down from $126.4 billion in November. This category covers Treasury securities and private company bonds.

China's U.S. Treasury holdings are a result of the huge trade deficits the United States runs with China. The Chinese take the dollars Americans pay for Chinese products and invest them in Treasury securities and other dollar-denominated assets.

U.S. manufacturers argue that China's huge dollar reserves reflect a strategy by the Chinese government to keep its currency artifically low against the dollar to boost Chinese exports and dampen demand in China for U.S. products.

http://www.usatoday.com/money/markets/u ... alls_N.htm