One foot on the platform
One of the questions that’s puzzled me for a long time is: who would be silly enough to buy US 10-year bonds? Given the massive trade deficit, it’s obvious that the US dollar will have to depreciate a great deal against all its trading partners to restore balance. Despite recent gains, it’s already a long way off its 2002 peak against the euro, and the problem was already apparent then.
The standard answer is that foreign central banks are buying US bonds to prop up the currency and keep their exports going. Reports from the US Treasury International Capital System give some support to this idea – foreign central bank holdings of US government securities have risen sharply. But when you look at the maturity structures reported in Tables 9a and 9b of the Report on Foreign Portfolio Holdings of U.S. Securities (PDF file) something interesting emerges. The median maturity for all holdings of long-term US securities is four years, but for official holdings its only three years. Nearly 75 per cent of all foreign holdings of US securities (and these amounted to $1.3 trillion as of June 2004) are for maturities of less than five years. For private holdings, the median is five years, and 25 per cent are for more than ten years.
This is very puzzling. It looks as if the foreign central banks are keeping their options open. At least if the dollar undergoes an orderly decline, they will be able to unload without too much loss. But private investors are in deep.
If this was equity investment it would be comprehensible – maybe these are people who really have faith in the capacity of the dynamic US economy to generate big profits. But large holdings of long term bonds seem almost impossible to rationalise
Over to you.