Interesting data showing who is funding the U.S. budget deficit and how the profile has changed since the financial crisis. We excluded 2008 as the aggregate data was distorted due to the Federal Reserve’s $265 BN sale (or exchange?) of Treasury securities, which appear to have gone directly to the broker/dealers. *
Though foreign central banks continue to be the largest buyers of Treasury securities, on a proportional basis, their $974 BN net purchase during 2009-Q32010 declined dramatically. Foreign central banks effectively funded 73 percent of the $421.2 BN cumulative deficit for 2006 and 2007, and only 30 percent in 2009-Q32010. There was massive swing in the household sector, who went from large net sellers in 2006-07 to funding 28.2 percent of federal borrowing in 2009-Q32010. The Fed became the third largest buyer of Treasuries during 2009-3Q10, which will certainly increase with QE2.
We conclude from the data that unless the foreign sector significantly steps up it Treasury purchases, which will largely depend on the direction of the current account deficit, capital flows, and foreign exchange rate policies, the bond market will remain under pressure. Furthermore, we expect households to begin reallocating to equities, putting increased pressure on the Federal Reserve to maintain the stabilizing bid in the market.
Looking at the flows, — i.e, budget deficits and the profile of buyers — it is hard to make a case for lower interest rates. Stay tuned!
* Data subject to statistical discrepancies; Q32010 is annualized data.