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THE US Treasury is auctioning a record US$104 billion (S$152 billion) worth of bonds this week as it seeks to fund President Barack Obama's massive rescue plan for the world's largest economy.
The Treasury auctioned US$40 billion in two-year notes yesterday, and will sell US$37 billion of five-year debt today and US$27 billion of seven-year securities tomorrow. The total amount is the largest since the United States began sales of this combination of maturities in February.
The question is whether the US can count on some of its biggest creditors such as China, Japan and Russia to buy the new offerings.
New figures released by the Treasury Department last week show that these countries dramatically cut back their buying of US government debt in April. Foreign purchases of Treasury bonds fell to US$11 billion (S$16 billion) in April from US$55 billion the previous month.
Weak demand for bonds means that interest rates may have to rise to rekindle interest in them. This is leading to fears that US mortgage rates could start to rise, given that they are partly based on 10-year Treasury bonds, which recently touched new highs.
High rates spell bad news for the gasping US housing market and for consumers who have run up record credit card debts.
And, for the world economy, the implication is that American consumers will continue to feel the strain and withhold the spending that has driven export factories worldwide.
The decision to cut back on holdings of US debt has partly been a 'rebalancing' act, said Mr Brian Bethune, an economist with IHS Global Insight, a leading forecaster and financial consultancy.
Several nations bought huge chunks of Treasury bonds late last year as they sought a safe haven from the financial turmoil gripping the world's markets. With the economy appearing to improve, they are now putting their money into equity markets.
'The perception of risk - fixed income versus equity - has changed, so this is a natural rebalancing. Still, I would not expect a large flight from Treasury bonds,' said Mr Bethune.
The shift away from US government debt also reflects the discomfort investing nations feel about Washington's trillion-dollar spending plans that are financed largely through borrowing.
By one calculation, the Treasury has to issue about US$15 billion of borrowing every business day until the end of the year to fund its programmes, which include a US$787 billion stimulus package to revive the economy.
In April, China reduced its holding of US Treasury bonds for the first time in over a year. The reduction was US$4.4 billion, representing just a fraction of its total holdings of US$763.5 billion.
Chinese analysts said last week that the bond cutback was in response to Beijing's concerns over the safety of dollar-linked assets.
Japan trimmed its total US bond holdings in April - the world's second-largest stockpile after China's - by US$800 million to US$686 billion. And Russia's holdings have fallen by US$1.4 billion to US$137 billion.
The Russians have made clear they would like to shift into bonds issued by the International Monetary Fund that are pegged to a basket of currencies called Special Drawing Rights. China caused shockwaves in March when its central bank governor proposed a global reserve currency as an alternative to the dollar.
Mr Bethune said the US needed to bolster investor confidence. 'It should be noted that even in a recession, the US has made productivity gains, and inflation is expected to stay low. These factors should induce confidence in the US economy.'
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