Foreign appetite for U.S. debt falls

Foreign demand for U.S. treasury bills fell in December 2009by the largest amount on record, data released Tuesday shows.

The U.S.Treasury Department saidtotal foreign holdings of U.S. treasurybills fell by $53 billion US, surpassing the previous record of a $44.5 billion US drop in April 2009.

China alone reduced its official holdings by $34.2 billion US. That drop allowed Japan to supplant China as the world's largest holder of U.S. debt. Japan boosted its official holdings of U.S. treasuries by $11.5 billion USduring the month, to $768.8 billion US.

In 2006, China was a buyer of nearly 50 per cent of net new U.S. debt. In 2007, the rate dropped to just over 30 per cent. In 2008, it dropped again to 20 per cent before settling at less thanfive per cent in 2009.

China's large U.S. debt holdings are a result of the trade imbalance between the two countries China takes the U.S. dollars Americans pay for Chinese-made goods and reinvests them in treasuries, bonds, stocks and other U.S.-dollar denominated assets.

U.S. manufacturers have long decried the practice as a way for Beijing to keep its own currency valued artificially low. Regardless,ifthe foreign trend to reduce U.S. dollar holdings continues, itcould forceWashington to offer a higher interest rate on its treasuries.

At a time when Washington is posting record deficits, having to pay still more to borrow funds would be problematic.

Much of the $53 billion US decline came from official government holdings. Foreign private citizens reduced their T-bill holdings by $700 million US.

For the year 2009 as a whole, foreign holdings oftreasury billsdeclined by $500 million US, putting more of the U.S. debt load on domestic sources. In 2008, total foreign treasury bill holdings increased by $456 billion US, largely on the back of a flight to the perceived safety of the U.S. dollar amid the financial crisis.

The flight to safety allowed Washington to drop the amount it pledged to pay out in interest. At times in 2008 and early 2009,the interest rate on some short-term treasury certificates dipped below zero.

On Feb. 1, U.S. President Barack Obama unveiled a federal budget that projects a $1.56 trillion US federal deficit for 2010, eclipsing the record $1.4 trillion US deficit it posted for fiscal 2009.