Worries over the impact of ever increasing federal deficits proved to be warranted as the Treasury Department reported Wednesday that foreign demand for long-term U.S. assets tumbled in July compared to June. Net buying of long-term notes and bonds only totaled $15.3 billion, much less than the $90.2 billion in net purchases for June.
July’s results show that foreign investors and governments may be growing weary of the federal budget deficits being run up by the U.S. government. The projected deficit for the fiscal year ending Sept 30 is now in excess of $1.5 trillion. Economists had expected foreign net purchases of U.S. assets to reach about $60 billion for July, well ahead of the actual result.
When including short-term securities, foreigners had net sales of $97.5 billion in July. That compares to just $56.8 billion in June.
China, the largest holder of U.S. debt, increased its total holdings to $800.5 billion in July from $776.4 billion in June. However, the increase came despite China’s recent questioning of the US dollar and its strength in the global economy amidst surging federal deficits.
The Unites States’ trade deficit with China is a main reason it owns the largest chunk of U.S. Treasuries. China takes in US dollars for the plethora of products it exports to America and turns around and invests portions of those proceeds into U.S. government debt. This scenario is viewed by some as a key reason the dollar will always remain overvalued compared to the Chinese Yuan, even if the Chinese government were to let their currency float.
Along with Treasuries, foreigner’s appetite for U.S. agency debt from companies like Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) took a sizable drop producing a net sale of $4.6 billion in July. That compares to net purchases just a month earlier of $5.1 billion.
