China pulls back on Treasury holdings

TEXT OF INTERVIEW

Bill Radke: And speaking of our budget, China is saying, “thanks, but no thanks” to U.S. debt. The Treasury Department said this morning foreign holdings of Treasury bonds fell by $53 billion in December — biggest amount on record. China reduced its holdings by $34 billion. For more on what this means for Uncle Sam, Marketplace’s Jeremy Hobson joins us live from New York. Hey there.

Jeremy Hobson: Morning, Bill.

Radke: Is this the doomsday scenario we’ve been talking about so much — China deciding to stop underwriting our debt?

Hobson: Well I spoke with one informed observer who says no, it is not. He’s Guy Lebas, he is the chief fixed income strategist at Janney Montgomery Scott. And he says this is a natural pullback. There was a lot of heavy buying of U.S. treasuries right after the financial crisis because, as you remember, it was viewed as the safest investment in the world. And everyone — including China — boosted their holdings of U.S. Treasury bonds.

Guy Lebas: They’ve gone from about $400 billion in the middle of 2007 to upwards of $750 billion today. So a little bit of a pullback isn’t really that unusual. I think the broader trend remains that the Chinese government continues to purchase a fair volume of treasury bonds.

Radke: OK Jeremy, but won’t the politics of this include people saying, see? We have to deal with our deficits before China dumps more of our bonds.

Hobson: You can bet it will, and even Guy Lebas admits that this debt dump by China means it’s going to become more expensive for the U.S. to issue debt. It’ll have to pay a higher interest rate, it won’t therefore be able to issue as much debt, and he says that’s going to force the government to either cut spending or raise taxes. Which of course is not going to be an easy task while Washington is trying to stimulate us out of this recession.

Radke: Marketplace’s Jeremy Hobson. Thanks.

Hobson: Thanks, Bill.