Households slow Treasury binge

December 10, 2010, 2:00 AM UTC

U.S. households have taken a breather in their two-year-long Treasury-buying binge.

The U.S. household sector, covering consumers, hedge funds and various and sundry other categories, bought $3 billion in government bonds in the latest quarter, the Federal Reserve said Thursday.

Lending us a hand

That follows a six-quarter binge in which the household sector bought up more than $800 billion of Treasury debt. Can cash-strapped consumers really have done this? Some skeptics have concluded no and say the government was cooking its books.

The lion’s share of the purchases, as is typically the case, falls into another amorphous category, the rest of the world. The U.S. government has stepped up its Treasury issuance since 2008, when the financial sector started to fall apart and the feds stepped into the breach to keep money flowing, and the chart at right shows that the biggest share of those funds has ended up overseas.

The report comes amid the latest debate over how nervous U.S. fiscal profligacy might make the foreign holders of our government debt, notably China, whose official Treasury stash is approaching $1 trillion (though its actual holdings are understood to be far higher).

But as hedge fund manager Hugh Hendry points out in the latest debunking of that fear, who is to say that the Chinese actually would mind big declines in the indicated value of their Treasury holdings as prices fall and yields rise?

I find the very vocal Chinese admonishment of the Americans strange. Sure they own over a trillion dollars of US short dated Treasuries and the value of this asset is vulnerable to inflation. But so what? The Chinese are not running a fixed income hedge fund; there is no consideration of two and twenty. Indeed I would happily wager that they would accept an almighty paper loss on such securities should it underwrite a robust cyclical economic recovery for their largest customer, the US. Remember all economic policies in China are predicated on maintaining the Communist party’s hold on power. The true nightmare for the Chinese has to be a prolonged Japanese style recovery in the west where US nominal GDP fails to grow beyond its debt fuelled peak of 2007/8.

(Via Kedrosky)