As China Slows US Debt Purchases, Will Treasury Rates Rise

The Administration is going to have to raise hundreds of billons of dollars to support its stimulus package, budget, and mortgage bail-out programs. Several things could make the process difficult, and the most troubling one is that buyers of Treasuries may want to put their money elsewhere. If so, the interest rates Uncle Sam will have to pay could spike up.

According to The New York Times, “Reversing its role as the world’s fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March.”

There are two ways to look at the news. The first is that US debt may, over time, not be as concentrated in one set of hands, hands that might give China some leverage over US policy as America raises more and more money.

The second is more problematic. The Treasury needs to raise an unprecedented amount of money. Every basis point that it has to pay out in additional interest would costs tens of billions of dollars over the next two years, making the need for capital to offset deficits even greater.

Douglas A. McIntyre