The question of who holds the US debt is important. The holders’ ability and willingness to buy more or their decision to sell existing holdings will determine the long-term interest rates of the US government, which, in turn, influences the cost of capital for the US private sector.
For example, if the buying comes from countries that persistently run trade surpluses with the United States, it might dry up once those trade surpluses disappear. If purchases come from domestic sources mandated by law to buy Treasuries, the government can safely count on continued purchases – unless the law changes.
If it comes from the Federal Reserve (currently the top holder of US Treasuries), future purchases will depend on the decision of Fed Chairman Ben Bernanke.
The chart below breaks down who the holders of US Treasuries are and it doesn’t look encouraging.
Foreign countries hold 32 percent of outstanding Treasuries. While they are expected to continue their purchases, the pace is expected to gradually slow as they diversify into assets from other countries like Australia, Canada, and the European Union.
The Social Security Trust Fund, U.S. Civil Services Retirement Fund, and U.S. Military Retirement Fund will likely continue their pace of purchases, or perhaps even increase it.
U.S. individuals and Institutions – which account for 42 percent of total holdings – may significantly scale back purchases.
First, the Federal Reserve is a big part of this group and it already owns over $1 trillion in Treasuries. Once/if QE2 is completed, it will hold even more. After QE2, there might be QE3.
However, the Fed will eventually need to stop QE and purchasing Treasuries – and even sell their massive existing holdings – thereby significantly denting the demand for newly-issued Treasuries.
Second, US bank holdings of Treasuries are at historic highs – due to the extraordinary conditions during the global financial crisis – and the pace of future purchases are highly likely to go down from previous levels.
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