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U.S. Borrows, Foreign 'Feds' Lend

August 08, 1994|TOM PETRUNO

The U.S. Treasury comes to market this week in its quarterly "refunding." Uncle Sam will suck up $40 billion in cash, issuing a like amount of IOUs in three-year, 10-year and 30-year notes and bonds consecutively beginning on Tuesday.

And who will buy these securities? Wall Street brokerages, institutional investors here and abroad, and individuals will invariably show up in numbers great enough to assure that every note and bond is sold. They always do.

But there's another type of investor in whose coffers U.S. debt is piling up, and with worrisome implications: Foreign central banks.

James Grant, editor of Grant's Interest Rate Observer newsletter in New York, notes that foreign central bank holdings of U.S. Treasury securities have rocketed from $300 billion at the start of 1993 to $391 billion now.

That total exceeds the $348 billion in U.S. Treasuries held by the U.S. Federal Reserve Bank system, Grant points out.

He makes two observations about the buildup of Treasury debt among the foreign "Feds":

* First, it tells us that foreign private investors are less and less interested in holding U.S. Treasuries, because if they were, the foreign central banks (as buyers of last resort) wouldn't be obliged to hold as much.

To put it another way, Grant says, the burden of financing the huge U.S. current account deficit--soaking up the excess dollars we send abroad because of our trade and budget deficits--is falling increasingly to central banks rather than to private investors. Not a good sign for Uncle Sam's long-term credit-worthiness.

* Second, Grant argues, it's a reasonable bet that the mountain of Treasuries at central banks will ultimately become inflationary for the world economy. "Sooner or later . . . voluminous net central-bank purchases of any financial asset (bills, notes, currencies) tend to create a monetary surplus, the first cause of inflation," he says. Too many dollars chasing too few goods.

Could that be another reason long-term bond yields worldwide have remained much higher this year than current low inflation would warrant?

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