Treasuries, dollar 'only game in town' as China buys

For all the hand-wringing over the dollar’s slide, the expanding US deficit and the nation’s AAA credit rating, the bond market shows international demand for American financial assets is as high as ever.

The Federal Reserve’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 per cent, in May, the third most on record, data compiled by Bloomberg show. The Treasury said bidding from foreigners was above average at its $101 billion of note auctions last week.

US government securities have tumbled 4.3 per cent so far this year, the worst performance since Merrill Lynch & Co began tracking returns in 1978, as so-called bond vigilantes drove up yields to punish President Barack Obama for quadrupling the budget shortfall to $1.85 trillion. The purchases by foreigners show that, at least for now, there’s little chance of buyers abandoning the U S or threatening the dollar’s status as the world’s reserv he widest, deepest, most actively traded market in the world,” said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd, which advises community banks investing $20 billion of assets. “There’s really no other game in town.”

Concerns about international investors have grown as the US Dollar Index weakened 8.6 per cent since February and Obama and Fed Chairman Ben S. Bernanke committed $12.8 trillion to thaw frozen credit markets and snap the longest US economic slump since the 1930s. About 51 percent of the $6.36 trillion in marketable Treasuries are held outside the US, up from 35 per cent in 2000, according to data compiled by the government.

Goldman Sachs Group Inc, one of the 16 primary dealers required to bid at the Treasury’s debt auctions, estimates that the US may borrow a record $3.25 trillion this fiscal year ending Sept. 30, almost four times the $892 billion in 2008.

“There’s an awful lot of Treasury issuance going on,” said Michael Moran, the chief economist at Daiwa Securities America Inc in New York. “In the back of everyone’s mind there’s a realization that although the short-term fiscal situation is difficult, so too is the long-term situation. People are looking down the road, seeing budget deficits remaining wide and they are thinking the US possibly can lose its AAA rating.”

Treasury Secretary Timothy Geithner, in an interview with Bloomberg Television May 21, said the administration’s goal is to cut the budget deficit to 3 per cent of gross domestic product or smaller. That would be down from a projected 12.9 per cent this year.

Geithner arrived in Beijing yesterday with a pledge to control borrowing as he sought to reassure China its holdings of US government debt are safe. “No one is going to be more concerned about future deficits than we are,” he told reporters on the way to two days of meetings in China’s capital.