US Set For Trouble When Foreigners Cash In Treasury Bonds

Meanwhile, one thing against which the dollar rose sharply last week was bonds. The bond market went down, meaning yields went up. Investors were able to buy more bond yield per dollar. Or to look at it differently, a dollar bought less credit than it did the week before.

When a house changes hands in Lafayette, Lousiana, the world doesn’t even notice. It is a local affair, between willing buyer and eager seller. But when a US Treasury bond gets bought, the whole global financial community watches carefully. They are keeping an eye on both the price of credit and the value of the dollar. When bond yields go up, it means the dollar is a more valuable thing. A dollar, invested in US Treasuries, will bring more in return than it did before.

But it can mean a lot of other things too. It can mean that investors are worried. They are insisting on a higher yield, perhaps because they think that with inflation, the dollar itself will buy less of everything else in the future, and they want higher yields to offset it. At 5%, there’s not much of a cushion. An inflation rate of 2% leaves only 3% in real return. And since the whole 5% is taxable, an investor really only ends up with a piddling return.

Something like fifty percent (US$2.2 trillion) of all US Treasury securities held by the public are now bought by foreigners, according to testimony before the House budget committee in January this year. Unlike American buyers, these overseas investors have to worry about another thing – the fall of the dollar against other currencies. All of which put the dollar…and U.S. Treasuries…and U.S. interest rates…and, by extension, the whole U.S. economy…in a rather delicate situation. Right now, the foreigners still feel pretty good about holding American I.O.U.’s. When they change their minds, the United States is in big trouble.

Bill Bonner
Markets and Money


Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, Markets and Money is published in 7 countries with a worldwide readership of almost 1 million people.

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