Tarpley & Underwood
Financial Advisors, LLC
What if other nations stop buying our debt? There are three potential side effects. One, interest rates would likely increase as there would be fewer buyers for Treasuries. Two, the dollar could weaken. Three, long-term bond prices could fall.
Voices on the fringe worry about a scenario in which the central banks of China, Japan and other nations jettison dollars en masse or abruptly quit buying U.S. debt. Realistically, the odds of something like this happening are slim. These countries would have nothing to gain by stifling America’s chances for economic recovery, and these decisions would greatly harm the world economy.
Now for some good news. In May, our trade deficit fell to its lowest level since November 1999. It shrank 9.8% in May from April levels, defying analysts’ expectations – and offering a hint of economic recovery. Our deficit with China increased by $4.4 billion for May, but the 2009 increase is 12.6% under last year’s pace. The U.S. deficit with Japan reduced to its lowest level in more than 20 years last month.5
More good news. Domestic and foreign demand for Treasuries is still strong – in its auction in the first full week of July, the Treasury quickly sold $19 billion of 10-year notes, with Treasury yields hitting 6½-week lows.6 At least in the short term, it appears the government doesn’t have to struggle for buyers to fund its reforms and rescue efforts.
These are the views of Peter Montoya Inc., not Tarpley & Underwood Financial Advisors, LLC, and should not be construed as investment advice. Tarpley & Underwood Financial Advisors, LLC does not provide tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your financial professional for further information.
Citations.
1 moneycentral.msn.com/content/invest/extra/P140049.asp [1/5/06]
2 treas.gov/tic/mfh.txt [6/15/09]
3 nytimes.com/2009/01/08/business/worldbusiness/08yuan.html [1/8/09]
4 nytimes.com/2009/04/09/business/global/09yen.html
[4/9/09]
[4/9/09]5finance.yahoo.com/news/May-trade-deficit-apf-2840686452.html?x=0&sec=topStories&pos=6&asset=&ccode= [7/10/09]
6 forbes.com/feeds/reuters/2009/07/08/2009-07-08T205823Z_01_N08405527_RTRIDST_0_MARKETS-GLOBAL-WRAPUP-6.html[7/8/09]
[7/8/09]CHINA, JAPAN & OUR DEBT:
Will Other Countries Keep Buying Our Treasuries?
