Brad Setser

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Who bought all the Treasuries the US issued in 2008? And who will be the big buyers in 2009?

by Brad Setser
February 26, 2009

And just how important is China — clearly now the largest single holder of Treasury bonds — to the market?

Both questions matter more than ever — to the market, and to the US government.

There is no doubt that central banks and sovereign funds, led by China’s reserve managers, were huge buyers of Treasuries in 2008. The work I have done with Arpana Pandey suggests that central banks bought close to $600 billion Treasuries in 2008 — with China accounting for a bit over half the total. Total central bank reserve growth likely was around $1 trillion in 2008 (though obviously it was much higher earlier in the year than later in the year; $600 billion is consequently a plausible sum. That estimate is far higher than the number reported in the TIC data — but the TIC data also is known to under count central bank purchases. Watch what happens when the survey data comes out. $600 billion is also a record. Back in early 2004 — at the peak of Japanese purchases — total purchases of Treasuries only reached $300 billion.

The US must then now be completely dependent on the central bank bid.

Not really. Total ‘marketable” Treasury issuance – if the marketable Treasuries that the Fed sold to finance its lender of last resort activities are counted as increase in the outstanding stock of marketable Treasuries — topped $1.6 trillion in 2008.

That implies, if the Pandey/Setser estimates for official purchases are right, that private investors snapped up more Treasuries than the world’s central banks. Central bank demand accounted for a far smaller share of total issuance than in the past few years. In 2007, for example, central bank purchases easily exceeded total issuance. The big increase in demand for Treasuries in 2008 came from private investors in the US. The “money” graph:

Moreover, with global reserve growth slowing — total reserve growth was close to zero in q4, and it may not be all that much higher in q1 — central bank demand for Treasuries is likely to fall. Central bank purchases in the last part of 2008 were inflated by a shift out of Agencies, but that (presumably) won’t continue forever.

That implies, I think, that the ability of the US to finance large deficits at low rates depends far more than it has in the past on private investors willingness to buy Treasuries. That was in doubt a few weeks ago when the markets were focused on the risk of a Treasury bubble and the scale of the Treasury issuance associated with the stimulus and various bailouts. Now the market is more focused on the risks tied to a strong global downturn — and the remaining risks in the financial sector …

Net/ net is the US more or less reliant on China? That is an issue that seems to be on everyone’s mind.

Andy Xie expresses the common concern over at the New York Times:

China is the largest owner of the U.S. treasury bonds. Some estimates put China ‘s holdings of the U.S. debt papers at $1.7 trillion. Since President Obama’s $783 billion fiscal stimulus will be financed by issuing more treasuries, there’s no doubt China’s continued buying of the bonds will be essential.

In one sense, Xie is right: The sheer scale of the United States’ governments borrowing makes every buyer more important.

If China suddenly stopped buying Treasuries in the way it stopped buying Agencies last June, it would almost certainly have an impact on the market. Unless, of course, the Fed stepped in — but that too would have consequences.

On the other hand, today’s world is very different from the world of 2005, 2006, 2007 or even the first half of 2008. The United States’ current account deficit is smaller, which means that there is less money for the surplus countries (in aggregate) to recycle back into the Treasury market. Nor are emerging market central banks recycling private capital inflows back into the Treasury and Agency market.

Conversely, America’s household savings rate has increased – and Americans, after long shunning low yielding Treasuries in favor of risk assets with more (potential) upside — have rediscovered the joy of knowing that you will get your money back, with a small amount of interest.

A world with $1750 billion US fiscal deficit and a $500 billion US current account deficit only works if Americans are willing to buy an awful lot of Treasuries. The borrowing need of the US government is now far too big to be covered by the (much reduced) growth in the emerging world’s reserves.

That leaves aside the possibility that key central banks might reallocate their portfolios. Americans could buy a lot of Agencies, allowing a country like China to finance Treasury purchases through Agency sales. But setting aside flows into the Treasury market from the ongoing sale of Agency debt, the slowdown in global reserve growth implies a slowdown in central bank financing of the US.

Even as issuance rises.

The overarching assumption behind the stimulus is that a rise in US household savings (linked to the fall in US household wealth) will create a pool of domestic savings that will flow, given the ongoing contraction in private investment, into the Treasury market. The rise in private savings and fall in private investment will allow the US government to borrow more even as the US economy as whole borrows less from the rest of the world. The key to the Treasuries rally in 2008 was the surge in private demand, not the strengthening of official demand. My guess is that the Treasury market will be driven by developments in the US – not developments in China – in 2009.

If the US issues $1700b of marketable Treasuries in 2009, China would need to buy around $250 billion to maintain a 15% share of the total market.

That isn’t at all implausible if capital outflows from China subside. Let’s say other central banks buy another $200 billion (which implies a further reduction in central banks’ share of the outstanding stock of Treasuries in the market). Custodial holdings of Treasuries over at the New York Fed have continued to creep up in the first two months of 2009, even as overall global reserve growth remains subdued. The resulting $450 billion in total central bank purchases would be the second highest level of demand for US treasuries from foreign central banks on record. But the math only works if private investors snap up $1250 billion of Treasuries, or a little more than they bought in 2008.

Thanks to Paul Swartz and Arpana Pandey for help with the collection and analysis of the Treasury issuance and TIC data. The data on the outstanding stock of marketable Treasuries comes (via bloomberg) from the monthly statement of the public debt. The adjustment for Treasuries held at the Fed is based on the Fed’s balance sheet data. Our methodology for estimating true official purchases of Treasuries is explained in our recent paper on China (watch for an update).


  • Posted by Cedric Regula

    gillis:”why has no other civilization contacted us ?perhaps because this is as far as civilizations go.”

    I’ve done extensive research of sci-fi novels, so I’m an expert on alien civilizations.

    One thing they all seem to have in common is fusion power and wormhole travel.

    Fusion power is like a miniature sun you can keep in a small building (see Spiderman 2 for reference). All you need to do is feed it hydrogen now and then. Remember the excitement about the Hydrogen Economy during Bush’s first election campaign? That’s obviously why.

    The Ministry of Chinese Chaos Theory Mathematicians (MoCCTM) predict humans will gain fusion power technology in the later half of this century and therefore the Chinese Communist Party is planning accordingly.

    MoCCTM has a lot of credibility in these matters. They first developed the mathematical model predicting that if the Party quotes GDP growth numbers of 8% or better, the probability of worker food riots is less than 3%, or well within statistical error.

    They extended the math model to the US GSE market and accurately flagged the Party that trouble was brewing here last summer. The Party was able to move in time and protect Chinese interests.

    So do not underestimate any predictions the MoCCTM makes.

    Wormhole travel is a different story however. MoCCTM attempted to model this but realized wormholes are a consequence of mathematical deduction, but none have been discovered yet. So they are unable to model any real probability of space aliens contacting us.

    I happen to think that we haven’t found any nearby, which would be the easiest place to look, so it may take space aliens a little longer to get here when traveling the last leg thru normal space after a long wormhole jump.

  • Posted by greg


    2 Fish: I don’t mean to suggest that China’s future difficulties will resemble Indonesia’s absence of sufficient reserves. Obviously, China “learned” (wrongly, I would argue) from the previous crisis. I have in mind a continuing deterioration followed by a “dead cat bounce.”


    Sufficient reserves weren’t a problem for China during the Asian crisis. China had one of the largest fx reserves at the time and was ready to defend Hong Kong’s currency against massive speculations. China didn’t need to “learn” that lesson. The countries that were hit hard had borrowed heavily, mostly short-term loans, from foreign banks; the foreign investments came in mostly in portfolio investments; the exchange rates were floating (there were a lot criticism on Malaysia when it adopted the pegged currency policy to deal with the crisis, but it eventually proved they did the right thing).

    Contrast that to China, which had a fix exchange rate, had foreign investments mostly in FDI and had sufficient fx reserves. If anything, those countries learned a lot from China. The reason that China has nearly 2 tr USD reserves today is not because it purposely accumulated fx to guard against another Asian crisis.

    I suppose in the current crisis, more than a few countries can learn from China, too.

    I would be careful to make the “coming- collapse-of-China” type prediction; a lot of people did that before …

  • Posted by Twofish

    Qingdao: China said its 8 percent growth target for this year is within reach even as the worst financial crisis since the Great Depression hammers economies worldwide.

    I think it is possible. Optimistic, but possible. There is a huge amount of stimulus money both in the US and China that is going to kick in in about two to three months.

    The question that needs to be thought about is less “Can China achieve 8% GDP growth?” since if you print enough money than anything is possible, but rather “Should China achieve 8% GDP growth? And what happens next year if it does?”

  • Posted by Twofish

    Qingdao: Obviously, China “learned” (wrongly, I would argue) from the previous crisis. I have in mind a continuing deterioration followed by a “dead cat bounce.”


    The main thing that would cause things in China to get continually worse is the fall in exports. So lets assume that over time exports continue to fall to zero.

    If this takes place over a year, then as exports fall, you can ramp up domestic spending to make up for the gap.

    The big difference between China and the United States is that China has a functioning financial system, and only major one financial crisis, whereas the US has three interlocking crises (unemployment, banking, foreclosures).

  • Posted by Twofish

    BTW, my view is that China learned most of the lessons correctly from the last crisis, and that is this crisis progresses that will become more and more obvious.

    Already it should be obvious that Chinese banks are in far better shape than US banks. Even if you argue that Chinese banks are being propped up by fancy accounting (which they aren’t), then they are in at least good enough shape that you can prop them up with fancy accounting.

    One other thing is that y/y figures may be misleading since they are going to be incredibly ugly for the next several months. The really important figures are m/m figures which are really difficult to get accurate numbers for. The two problems with month-to-month numbers is that there is an incredible amount of noise in those numbers, and the second problem is that all of the major economic numbers have large seasonal adjustment associated with them.

  • Posted by Twofish

    greg: The reason that China has nearly 2 tr USD reserves today is not because it purposely accumulated fx to guard against another Asian crisis.

    I think that was indeed part of the motivation. China looked at the Asian crisis and saw areas in which it was vulnerable. Even through China didn’t see capital flight in the Asian crisis, there was a belief that as China opened their economy, that there would be new avenues for capital flight which implied that as China did loosen capital controls, that it would have to increase reserves.

    However the *BIG* lesson from 1998 was to have a good banking system. Chinese officials weren’t too concerned about the banking system until 1998, when they saw banks in Indonesia fall and Suharto fall with them. At that point they started undertaking a multi-year program to fix the major banks, which they did. This involved pulling in all sorts of advisors from Wall Street who were happy to tell Chinese banks how to improve risk management since no one in NYC was listening to them.

    The dirty secret of Wall Street is that with the exception of a few banks (and you can tell which one’s since they are the one’s that aren’t on the list of ones that people are thinking of nationalizing), risk management is what you do if you want to end your career.

  • Posted by Twofish

    With the previous post, since the *is* to *was*. Things have changed.

  • Posted by df

    Hi Brad, and cheers to all,
    It s been long since i ve commented much. New job, european elections … Mostly also the feeling : everything happening was just so predictable …

    So it seems we ve finally reach the international turning point. As I commented long ago, the national debt bubble exploded before the international one did. Now it seems the international debt bubble is about to explode.

    Ok. So now I have a question. It has been self evident for me that the Fed has to step in, that the only way out of this debt bubble is throuhg massive FED injections of cash anhilating debt through inflation (or at least a slowing of the deflation rythm).

    So please, Brad could you develop this :
    “Unless, of course, the Fed stepped in — but that too would have consequences.”

    This is my only question, what then would be the consequences of the FED stepping in ?

    Indeed why has not the fed stepped in long before.
    It could have driven the dollar down this way. This would have curbed chinese and asian export growth.

    It s been 5 years now that I ve been advocating huge cash injections and strong regulation in order to drive private agents out of the money printing business.

    Now private that money printing is dead and regulations coming big time, what delays massive cash injections ?

  • Posted by bsetser

    gauis marius

    thanks for the comment; I enjoy your blog —

    I am a bit less inclined to think that the US will have to engage in inflationary quanitative easing to cover the fiscal deficit, for three reasons:

    a) Following goldman, i wouldn’t be surprised to see a household savings rate of 6-8% by the end of 09. Moreover, private investment is declining — both of which free up a pool of savings to flow into the treasury market.

    b) The fed now has an unusually small quantity of treasuries on its balance sheet. if private investors put their dollars into say citi debt, the fed could reduce its credit line to citi — and buy treasuries, replenishing its warchest.

    c) Any treasuries sold to finance the purchase of bad debt off the banks are in effect just a swap with the banks. the government could give the banks treasuries and take the bad debt w/o going through the market process. lots of countries actually finance bank bailouts with special issue treasury bonds that aren’t traded (or carry low coupons) that end up sitting on the banks balance sheet. the us hasn’t done it this way, but if the TARP money injected into the banks flows back into the treasury market, the net effect is the same.

    d) having looked at the survey data, i would expect some central bank reallocation from agencies to treasuries to continue (of course, that creates other problems … ). but also remember that a lot of the funds that previously were flowing into private asset backed securities will be looking for a new home.

    to be sure, there is a possibility that the fed will have to step in — and not just b/c a resurgence in private demand for riskier assets allows it to improve the quality of its asset base. but I see a path where government really does fill the gap created by a fall in private investment/ rise in private savings/ surge in demand for safe assets.

  • Posted by bsetser

    df — if asia keeps its peg to a depreciating dollar, the fed easing doesn’t produce a depreciation of the dollar v the world, it produces a depreciation of the dollar and most of asia v europe, something that increases asia’s surplus with the world, asia’s reserve growth and asia’s financing of the us.

    that at least is what we saw in 02-04.

  • Posted by gillies

    df : stay with us – you provide welcome balance.

    cedric regula ; “I’ve done extensive research of sci-fi novels, so I’m an expert on alien civilizations.”

    no – i am on a completely different wavelength. you are talking science fiction. i am drawing attention to ecological realities. if the financial sector was still expanding as the real economy was beginning to contract – wild inequities and instabilities were bound to follow.

    if i sound too way out for some – a reading of reports about california’s water crisis, and thinking through its implications – might be a lesson nearer to home.

  • Posted by gillies

    there is an old maxim that the man who makes the real killing in the gold rush is the man who sells shovels.

    but we are in part 2 of the gold rush. there is now believed to be no gold in them thar hills . . . . so bad as that looks for the gold prospectors, it is worse for the shovel shop, for the shovel shop’s bank and mortgage provider, for the people who borrowed on margin to buy shares in the bank, and for the thousands of others who bought shredded mortgage paper and believed that it was as good as the gold (that was not there in the first place).

    the boom lasted while the people believed that there was gold up there.

    wall street new york, canary wharf london, singapore ? shanghai ? dubai ? ghost towns.

    a rebound ? the fed is already talking about damping down the rebound if and when . . . .

    people will walk back to the real bread and butter economy and governments and pundits will have no choice but to follow.

  • Posted by Kafka

    Two Fish, funny but disingenuous. I can take the 4th derivative of any Euler equation and concoct whatever causation correlation makes me feel good. At the end of the day all that exists is market price, pure and simple. Try trading the markets 18 hours a day, you may get a better understanding or if that is too hard (because it is), make some long term bets based on your economic theories, all that matters is the math and the market price (and of course getting it right). The Banking problem is simple, most of the banks are insolvent, banks now have a forward looking business model equivalent of utilities and the U.S. economy is merely based on unsustainable debt financed consumption supported by the most powerful military the world has ever seen. The Politicos can dither about all day and perhaps delay the inevitable but only one result can obtain, the math is simple. Citi is done, BAC is next and JPM has the most fraudulent financials of them all. Buiter has a simple solution but no one will listen because it is not politically expedient and well, too simple. I am not complaining since the longer the Politicos drag this mess out with the help of econometric gurus, the more money for my kind (but I feel bad for all the deluded citizens in this country). As for BO and ideologues and the way the world works, perhaps you ought to read your own words? Roubini saw this pending disaster from miles away and used simple math to prove his points yet no one listened (and they still don’t). The world works exactly as it should based on math and Darwin, it is quite simple, read a little history, over time fractional reserve lending with fiat money (or credit) has never ever worked. There is only one destiny for a country that consumes too much, borrows to much, has a relative decline in productions and exports and a powerful military, GWB accelerated the downward spiral and BO may finish it with a massive redistribution of wealth, the only alternative (aside from increasing productions and exports which will never happen). I have put my long term money where my mouth is, short long term Treasuries, short the dollar through a basket of currencies, short financials; the math is simple and I appreciate you and your kind trying to make it complicated, more profit for me, but it aint good for all the deluded citizens of this country.

  • Posted by df

    Brad thanks for your answers and gillies for comments.

    Brad I agree with you partly short term and flow side.

    1I think the fed has already started to step in. I d love to have the numbers on its balance sheet.

    2 Indeed there s a huge consumin and investing crunch, government is stepping in, all it does is using the spare cash that would have ended up being standard speculative money sitting in cash or cash like accounts waiting for deflation.
    This agreement however is only short term, Sooner or later, government debt will be so high that private investors will shun it, so the fed will have to step in and inflate everybody out of debt. which is great provided regulation takes care of redistribution effects.

    3 all this is a look at economy as a flow. I also care about the stock of debt and the stock of capital goods.

    The thing is the debt/ gdp ratio is already over 250%with gdp falling that fast it ll soon be over 350 possibly reaching 500 …(if 1929 teaches us sth about the future)

    That kind of debt level can not be repaid. It has to be deleted either through bankrupcies or inflation or one then the other.

  • Posted by Kafka

    While my econometric skills are severely lacking, if the Fed, I mean Goldman is right and savings sky rockets to 8% what happens to consumption? If consumption continues its rapid decrease, what happens to GDP? If GDP continues its rapid decline, what happens to tax revenues (which are already on the decline)? If the Fed, I mean Goldman is correct and S&P earnings go to $40 for 09 doesn’t that mean many corporations will be operating at a loss given the massive amounts of debt accumulated to fuel the consumption growth (we already know if you add in government theft and bad debt losses, the banks will overall never be profitable on a cumulative basis in our lifetimes)? If increased savings go into Treasuries, surely it will only be short term, what about long term Treasuries? If unemployment continues its increasing rate of increase or even levels off, what happens to GDP and consumption? How does borrowing money to allegedly stimulate the economy (and line the Politicos and their friends’ pockets) do anything but under the best case scenario prevent a more rapid decrement in a debt financed consumption based economy? BO is likely gonna add about $10 Trillion to the national deficit in a period of declining revenues, how is that gonna solve anything especially since it is unlikely the rate of production or exports will increase? Whack a mole is a game for children. Schumpter and Darwin knew that of which they spoke.

  • Posted by greg


    “I think that was indeed part of the motivation. China looked at the Asian crisis and saw areas in which it was vulnerable. Even through China didn’t see capital flight in the Asian crisis, there was a belief that as China opened their economy, that there would be new avenues for capital flight which implied that as China did loosen capital controls, that it would have to increase reserves.”

    China’s financial system had problem back then (mainly NPL problems), but was not the kind of problem that South Korea and Southeast Asian countries had (combination of foreign short-term loans, floating exchange rates and loose capital control). China’s banks were (and are) owned by the states, had little exchange rate risk exposure and the majority of the foreign capital were FDI. China does need foreign reserves, but as China’s economy is configured, it almost always has current account surplus. That’s why I disagreed with QingDao that China somehow “learned” the lesson to accumulate large sum of foreign reserves.

    Particularly, China does not need 2 trn USD fx reserves. That’s a waste of resources and put China in a quandary. The huge fx reserves were the result of maintaining a stable exchange rate. It may look good now for China to hold such a large fx resevers, but had China started the adjustment earlier and quicker – it should have started RMB appreciation in ’04 and allowed RMB to appreciate in ’05, ’06, and ’07 as quickly as in ’08, it would not have so much fx reserves, but then again it would not depend so much on export and therefore would not need that much reserves anyway.

    These are all hindsight now, of course.

  • Posted by Lyle Burkhead

    Japanese savers could buy a lot of Treasuries. The alphaville link provided by gauis marius says:

    The Ministry’s latest figures, published today, show that Japanese investors bought JPY 1.23 Trn worth of foreign bonds in the week ending February 19th – a figure only exceeded over the past four years by the JPY 1.36 Trn worth of purchases the previous week. Whilst the magnitude of last week’s total spend is hardly a rarity, consecutive weeks’ purchases of such magnitude most certainly are, and we have to go back to the autumn of 2001 to find comparable figures.

  • Posted by df

    with falling asset prices, how is the asset/debt ratio going these days ?

  • Posted by df


  • Posted by df

    seems posting links is not allowed, well, too bad.

  • Posted by Judy Yeo


    sorry to interrupt your chat with 2 fish but do you really believe that China’s reserves are really to back up its exports? (re your last comment: it would not depend so much on export and therefore would not need that much reserves)Whatever China’s yuan policy, its dependence on export would have been hard to change as it is now. Turning an ocean liner requires as much luck as time, capacity and foresight /planning, not to mention enough deep blue sea. changing from export oriented to consumption based is not something which can be done in a couple of years.

    as for the treasuries issue, perhaps Hilary Clinton’s sales pitch is alreafdy a clue in itself?!

  • Posted by Twofish

    Kafka: , I mean Goldman is right and savings sky rockets to 8% what happens to consumption? If consumption continues its rapid decrease, what happens to GDP?

    What should happen is that consumption goes down, investment goes up, demand stays the same. If you increase savings it changes the components of GDP, but it doesn’t change GDP itself. Less money spent on buying consumer goods, more money available to build new factories.

    Where this breaks down is that it requires banks that takes savings and then creates loans, and if you have sick banks, then this isn’t happening.

  • Posted by Twofish

    Kafka: How does borrowing money to allegedly stimulate the economy (and line the Politicos and their friends’ pockets) do anything but under the best case scenario prevent a more rapid decrement in a debt financed consumption based economy?

    Borrowing massive amounts of money pays for the transition from a debt-financed consumption based economy to a savings-financed investment based economy.

  • Posted by Kafka

    Twofish, dude, I does not increase tax revenues much and what is I gonna be in, the consumers are already maxed out, the U.S. can’t compete with China in manufacturing unless prices increase dramatically (which of course creates a whole other set of problems). I would have thought by now the rational actor model would have been debunked, maybe not. I will say it once again, you can move the paper around all you want unless production and exports increase, nothing is gonna matter as everyone in the U.S. moves closer to an ever decreasing middle, welcome to the USSA.

    The current crisis might be characterized as an example of the final stage of a well-known boom-and-bust pattern that has been repeated so many times in the course of economic history. There are, nevertheless, some aspects that make this crisis different from its predecessors: First, the preceding boom had its origin – at least to a large part – in the development of new financial products that opened up new investment possibilities (while most previous crises were the consequence of overinvestment in new physical investment possibilities). Second, the global dimension of the current crisis is due to the increased connectivity of our already highly interconnected financial system. Both aspects have been largely ignored by academic economics.

  • Posted by Ron

    More Americans Are Saying No to the FED & the National Debt!

    Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. Find out what a growing repudiate the debt movement could mean for treasuries, the dollar, gold and mining shares.

    The Campaign to Cancel the Washington National Debt By 12/22/2013 Constitutional Amendment is starting now in the U.S. See:

  • Posted by balckswan

    Why would US savers buy 20-30 year treasuries?

  • Posted by blackswan

    hey can you fix my name and delete this message?