Fed stimulus fears send US buyers toward treasuries

United States investors are buying treasuries at a faster pace than foreigners for the first time since 2010, aiding the government in its efforts to borrow as total public debt outstanding rises above US$16 trillion.

Government debt securities held by domestic buyers, excluding the Federal Reserve, rose 10.7 per cent in the first seven months of this year to US$3.61 trillion, compared with a 6.9 per cent increase for countries from China to Germany, according to the latest Treasury Department data. Foreign purchases grew 13 per cent last year, while US holdings fell 4.6 per cent.

Record-low yields are proving no deterrent to US buyers concerned that unprecedented stimulus by the Fed and chairman Ben Bernanke may neither stimulate the economy nor bring down a jobless rate that has exceeded 8 per cent since February 2009. The government is dependent on demand for its debt as it seeks to finance a budget deficit poised to exceed US$1 trillion for the fourth straight year.

Bonds had "stopped being a total-return market", said Tom Graff, who managesUS$3.6 billion of fixed-income assets at Brown Advisory. "The high degree of uncertainty has caused excess cash to build up among household assets," he said.

While investors outside the US own 50.4 per cent of outstanding treasuries, up from 49 per cent in May last year, their share fell from 55.7 per cent in 2008. China, the biggest foreign owner, has cut its holdings to US$1.15 trillion from a peak of US$1.31 trillion in July last year.

Foreign holdings of US debt have been cited as a sign of vulnerability by Republicans in this year's election campaign. Borrowing costs for European nations from Greece to Portugal and Spain surged as non-domestic investors pulled back from their debt markets as deficits soared.

The amount of total US public debt outstanding has risen from less than US$9 trillion in 2007 as the government borrows to pay for spending programmes designed to help the economy recover from the worst financial crisis since the Depression.

Treasury 10-year yields fell 11 basis points last week, or 0.11 of a percentage point, to 1.75 per cent. That is down from more than 5 per cent in mid-2007.