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Our Treasury Bonds Diagramed
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Written by: Adam Ashby
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Word Count: 487 |
Date: Sat, 27 Jun 2009 |
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The U.S. Treasury bond market has come to receive serious attention in recent trading. When Treasury bonds show action, so does the dollar. If we see a decline in prices for long-term Treasury bonds, the dollar sinks. According to a March 2009 Fed's Flow of Funds Report, there are $14.5 trillion in Treasury securities, agency securities and mortgage-backed securities outstanding.
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Many countries invest heavily in our country's debt as an investment and China is the top holder of U.S. bonds. Several top economists believe that if the purchase of U.S. bonds by China were to stop, the U.S. interest rates would increase to make our debt more attractive.
With the current out-of-control spending and huge deficit in government, U.S. Treasury securities' real value is the focus of more and more attention. China wants to make sure that their assets are safe, and if there is any question that U.S. credibility is in doubt, the option to liquidate some of their U.S. assets is more likely an option.
If China and other nations refuse to buy U.S. debt, the only alternative is for the U.S. Treasury to purchase Treasury securities which would dramatically increase the money supply. To attract investors, interest rates would need to rise. As is the case, when the Fed starts buying Treasury bills habitually, inflation ensues. The Fed in the mid-2009 scenario has used much of the money to buy over $500 billion in mortgage backed securities.
In a normal economic environment, higher interest rates would be associated with the central bank as they try to cool off inflationary pressures associated with an expanding money supply. However, with less demand for Treasuries, higher interest rates to attract buyer demand is the only viable recourse. Yet higher interest would only push an already declining economy, deeper in the hole. Higher interest rates mean a greater burden on the populace resulting in more mortgage defaults and negative pressure on consumer debt.
The current administration's record-breaking plans to fund the deficit and the Fed printing out dollar bills to buy the debt is staggering. The U.S. Treasury is pushing the yield on bonds even higher and the floodgates are open. Some economists are wondering who is going to be purchasing these bonds.
A nation who spends in an out-of-control way can eventually destroy itself. A famous economist believed that inflation was a disease which could destroy a society if it wasn't stopped.
China remains the number one holder of U.S. debt. Milton Friedman warned, "The Fate of a Country Is Inseparable From the Fate of Its Currency." Climbing interest rates and inflation scare an already fragile domestic and global economy. As such, the debt onslaught is boosting bond yields as the appetite for money to finance the government's budget deficit shows no sign of dieting.
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