America faces a battle to find buyers for its bonds … FT
America faces a battle to find buyers for its bonds
By Gillian Tett
Last week, Beth Hammack, a senior Goldman Sachs banker who chairs a US government advisory group known as the Treasury Bond Advisory Committee, dispatched a letter to Steven
Mnuchin, Treasury secretary, with a bombshell at the bottom.
According to TBAC calculations, America will need to sell an eye-popping $12tn of bonds in the coming decade, sharply more than it did in the past 10 years. This will “pose
a unique challenge for the Treasury”, Ms Hammack warned, even “without factoring in the possibility of a recession”. In plain English, the Wall Street luminaries on the committee were asking who on earth — or in global finance — will buy this looming mountain
The question is highly timely, if not ironic, given that Mr Mnuchin is heading to Beijing for yet another round of US-China trade talks. In recent decades China has been a reliable source of demand for American
debt, as the country amassed vast defensive foreign exchange reserves and its export boom left it with dollars to invest.
But now a shift is in the air: between May and November last year, China’s holdings of US Treasuries quietly shrank from $1.18tn to $1.12tn, well below the levels seen just three years ago, when China’s holdings
Chinese officials vehemently deny this decline is part of a political game. “We have to invest abroad and the US government bond market turns out to be a good place to invest,” Fang Xinghai, vice-chairman of the
China Securities Regulatory Commission, said last month in Davos, stressing that Beijing does not intend to “significantly reduce its investment into the US government bond market”.
Leaving aside the tangled politics of the US-China relationship, there are economic factors behind this decline: the Middle Kingdom is no longer amassing foreign exchange reserves at the same dizzy pace as before,
because of its slowing exports and demographic shifts.
Moreover, China is not alone: Ms Hammack warns in her letter that “a stagnation in international reserves” means there is likely to be “an increased need for this [US] debt to be financed domestically”. Indeed,
the proportion of debt held by non-American entities slid to 36 per cent last year, well below the level of nearly 45 per cent a decade ago — and the TBAC expects this downward trend to continue.
The good news is that America’s domestic savers have been enthusiastically jumping into the gap: by November last year, American households held nearly $2.3tn in Treasuries, up from $1.9tn in January. That has
helped to keep bond prices high, and yields remarkably low. On Thursday, for example, the yield on a 10-year Treasury was merely 2.68 per cent.
But the bad news is that the US need for debt is steadily increasing. This week, one of America’s biggest hedge funds privately concluded that in five years’ time the Treasury will need to sell bonds equivalent
to 25 per cent of gross domestic product, up from 15 per cent now.
This level of debt has occurred just twice in the past 120 years, first during the second world war and then again during the 2008 financial crisis.
The first time, the US government forced private domestic savers to buy its debt via a patriotic propaganda campaign and financial controls. The second time it relied on its central bank’s balance sheet via quantitative
However, the US Federal Reserve is now trying to unwind QE and those 1940s financial controls are no longer in place. “Because of the size of the US economy and markets . . . it will require about a 6 per cent
shift in global asset allocations” to absorb the debt, this hedge fund warned in a letter to clients that I have seen. “What if investors don’t want to make that shift?”
One obvious solution would be for Donald Trump’s administration to change its fiscal stance and reduce debt issuance. But don’t bet on that happening soon: the president did not even mention the deficit in this
week’s State of the Union speech.
Nor is it likely that Mr Mnuchin will be able to persuade China to buy more debt, given the trade war. That leaves the TBAC asking for new “blue sky” thinking and “innovation” to ensure that US savers keep “buying
American” bonds — and do so on an ever-expanding scale.
Let us hope this will work. If not, there is a danger that interest rates will surge. If nothing else, this patriotic drive is a striking back-to-the-future moment and another sign of a world where globalisation
is slowing down in some unexpected ways.