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China and Japan Dump More US Debt

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China and Japan dumped more US Treasuries in October, even as the federal government continued to run up its debt.

Chinese holdings of US Treasuries dropped for the fifth straight month, sinking to the lowest level since May 2017, according to data recently released by the Treasury Department. The total amount of US debt held by China fell from $1.15 trillion to 1.14 trillion. Over the past year, the Chinese have shed $50 billion in US debt.

Japan has also been selling US Treasuries. That country has divested itself of $76 billion from a year ago to $1.02 trillion. This continues a trend since the peak of its holdings at the end of 2014 ($1.24 trillion).

Meanwhile, the US federal government continues to spend itself deeper into debt at a staggering pace. Through the first two months of the 2019 budget year (October and November), the deficit totaled $305.4 billion. That’s a 51.4% increase over the first two months of fiscal 2018.

The national debt ballooned by $1.33 trillion over the last year. It now stands at over $21.8 trillion as of December 14, according to Treasury Department data.

That means the Treasury Department is selling bonds at a dizzying pace.  Long-term US debt sales have risen to a level not seen since the height of the financial crisis. In November alone, the US Treasury sold over $200 billion in public debt. The department has sold bonds at an average rate of $123 billion a month over the past six months. This pace of borrowing is expected to continue into 2019.

Over the last decade, the US government could always count on the Federal Reserve to buy its paper if nobody else would. The central bank gobbled up billions of dollars in US debt through its quantitative easing program in the wake of the 2008 crash. But the Fed isn’t buying either. The central bank shed $190 billion over the 12 months through October as part of its QE Unwind. The Federal Reserve now holds about $2.27 trillion by the end of October, according to WolfStreet.

Who is buying all of these bonds? So far, the Treasury Department has found buyers in the US.

US government entities such as pension funds, Social Security, etc. have taken up some of the slack. These entities increased their holdings by $168 billion to 5.9 trillion over the last year. As WolfStreet explained, “This ‘debt held internally’ is owed the beneficiaries of those funds; it’s their money, invested in Treasury debt, and the US government owes every dime of it. They now hold 27.0% of the total US national debt.

In other words, the US government is borrowing from the US government.

But by far the biggest buyers of US debt have been American institutions and individual investors. They have increased holdings by $1.41 trillion over the last 12 months.

Stock market volatility has increased domestic demand for US bonds. As WolfStreet noted, “The massive buying-pressure in the Treasury market, in part triggered by stock-market sell-offs, has been easily mopping up the flood of new Treasury debt.”  But even with this demand, the huge supply of Treasuries on the market has pushed prices down and yields up. The yield on the 10-year Treasury is up sharply from last year and has been hovering between 2.8% and 3.25% since early February.

The question is: how long will domestic buyers prop up the bond market?  And how high will interest rates need to go in order for the federal government to continue its out of control spending? As we’ve said repeatedly, rising interest rates in an economy built on debt aren’t good news.

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