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Foreign nations dump record amount of U.S. treasuries in December

This is something that smart people have been worrying about for more than a year: In December, foreign demand for U.S. treasuries fell by the largest amount in history.

According to the Treasury Department, foreign holdings of treasuries dropped by $53 billion in December. Most worrisome: China -- the second-largest holder of U.S. debt behind Japan -- shed $34.2 billion of its U.S. holdings. Indeed, China's big dump of U.S. debt dropped it out of its former spot as the world's top holder of U.S. debt.

The previous record plunge came in April 2009, when foreign holdings fell by $44.5 billion. That sort of makes sense. April 2009 was one month after the stock market hit bottom -- though we didn't know at the time that was the bottom. The U.S. economy looked as though it had hit a bottom in December 2008 but then the second bottom dropped out and by spring, it looked like an economy in free fall.

But by December 2009, the U.S. economy was looking better. GDP was rising and the stock market had recovered, oh, about 65 percent of its losses incurred since October 2007.

Yet foreigners are fleeing U.S. treasuries, which the U.S. sells to fund its operations. And, more to the point, its exploding national debt brought on by President Obama's $787 billion stimulus plan and likely expansion of health-care coverage. Obama's budget, released earlier this month, projects a $1.56 trillion 2010 deficit, beating last year's $1.4 trillion deficit. (The national debt is the sum of all yearly budget deficits since the founding of the republic.)

An economist told me last year: As long as foreign countries want dollars and want to keep buying U.S. debt, we're okay. Once that stops, we're in trouble.

Even if it foreign nations don't stop buying U.S. debt, what they will do is demand better terms if they're going to keep lending us money to keep feeding our spending habit. This means the U.S. will have to pay higher interest rates to nations like China to get them to keep buying our debt.

We've seen that in Greece, which foreign investors think is such a bad bargain, it has had to pay 6.43 percent interest on 10-year-yield bonds. This is the international equivalent of loan-shark rates.

The U.S. is paying 3.7 percent on its 10-year bonds today, which is a good rate. But make no mistake: If foreign nations keep dumping U.S. treasuries, that rate will go up, pronto.

Follow me on Twitter at @theticker

By Frank Ahrens  |  February 16, 2010; 11:21 AM ET
Categories:  Deficit/debt , The Ticker  | Tags: 10-year-yield, China, Treasury Department, bonds, debt, deficit, treasuries  
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