Fisher Investments Editorial Staff
Behavioral Finance, Deficits

Treasuring Treasuries

By, 02/17/2009

Story Highlights:

  • Some investors mistakenly believe the majority of US debt ends up in the hands of foreign governments that might abandon Treasuries en masse at any time.
  • The US government is actually the largest holder of US debt through various entities.
  • Foreign governments hold US debt for sound reasons, including market size, liquidity, and safety.
  • Treasury yields might rise some as investor risk aversion abates, but the most meaningful Treasuries investors are here to stay.


It's no secret, the US deficit is on the rise as the government seeks to put the economy back on sound footing with a wall of fiscal and monetary stimulus. To plug the hole in the budget, the government raises money by issuing US Treasury bonds, notes, and bills. That means our government's ability to run a deficit relies on investors' willingness to loan it money. Seems precarious, right? Investors could decide to abandon Treasuries at any time (in other words, stop loaning us money). But, never fear, the owners of US debt aren't that fickle.

It's a common belief that the majority of our debt ends up in the hands of foreign governments. Ask most people who they think owns the most US debt, and they'll likely say China or Japan. While it's true China and Japan are the largest foreign owners of US debt, their stockpiles don't hold a candle to the largest holder. So who is this well-heeled investor? The US government itself! In fact, the US government entities own more US debt than all foreign governments combined.

The government provides the total amount of debt outstanding daily—to the penny. The current total stands at $10.8 trillion. Of that, "intragovermental holdings" total $4.3 trillion or 40%. That's huge compared to the approximately 6% owned by China or the 5% owned by Japan. It even dwarfs the 27% owned by foreign countries in all. "Intragovernmental holdings" are owned by a number of government trust funds, revolving funds, and special funds. The largest is the Federal Old-Age and Survivors Insurance Trust Fund, better known as Social Security. And what are the chances Social Security's going away anytime soon? Pretty unlikely. Ditto for most other government funds.

Still, even if they're not our largest creditors, foreign governments are essential players in the US capital structure these days too. But fears foreign governments will abandon US debt are unfounded. The US Treasury market has a combination of size, liquidity, and safety that is unmatched by any other market in the world. Even foreign dignitaries who are less than thrilled with our fiscal policy concede as much. And our debt is bolstered by the size and strength of the US economy, by far the largest in the world. Japan's economy, the world's second largest, is less than a third the size of the US. Collectively, the euro zone economy is huge—even bigger than the US—but Europe is a strange bird. The European Central Bank sets monetary policy for member countries, but individual countries have their own fiscal policies and issue their own debt. And none of the euro zone's individual economies is even close to the size of the US. So what's a foreign government with oodles of investable capital to do? Seek out the largest, safest, most liquid market on the planet, that's what. Only Treasuries fit the bill.

Despite Treasuries' mediocre long-term return potential, panicked investors recently sold almost everything involving any type of risk and flocked to the safety of US debt. As a result, prices of corporate bonds, municipal bonds, commodities, and equities have suffered while Treasuries have surged. As investors' risk appetites increase, much of that money will undoubtedly leave the Treasury market and flow back into riskier assets (most notably stocks), causing Treasury prices to fall a bit and yields to rise. But that matters little to the most meaningful investors in US debt—come hell or high water, they're here to stay.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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