Our Treasury Bonds Interpetated

By Carol Spurgeon

The market for U.S. Treasury Bonds is receiving more attention recently. The value of the dollar tends to drop when long-term Treasury bonds decline in price. The March 2009 report of the Fed's Flow of Funds shows that there is $14.5 trillion outstanding in mortgage-backed securities, agency securities and Treasury securities.

China is the first holder of U.S. bonds and other countries heavily invest in the U.S. debt as an investment. Many economists suggest that if China stops purchasing the U.S. bonds, the economy would have increased interest rates which would make U.S. debt more enticing.

With the consequence of huge deficits and out of control government spending, the real value of U.S. Treasury securities are the focus of increased attention. China wants their assets safe and if any question of U.S. credibility would ensue, the pressure to liquidate a portion of their U.S. assets in self-survival mode may seem a likely option.

If foreign countries refuse to buy U.S. debt, the U.S. Treasury's only other option is to buy Treasury securities, thus increasing the money supply in a dramatic fashion. Interest rates would have to rise in order to attract investors. And, inflation would occur after the Federal Government habitually purchases T-bills. Currently, the Fed has used much money to purchase mortgage-back securities to the tune of $500 billion.

During normal economic times, higher interest rates are a result of the central bank trying to ward off inflation associated with an increased money supply. Yet, there is less of a demand for Treasuries and higher interest rates to entice buyer demand is the only other option. However, this would only accelerate a declining economy deeper into a hole. Higher interest rates only place a greater burden on the population which results in more defaults on mortgage loans and higher consumer debt.

The record-breaking Treasury offerings out of Washington along with the Fed churning out dollars bills is incredible. The floodgate pushed open by the U.S. Treasury is making bond yields soar. Economists are beginning to wonder who will be purchasing these bonds.

Inflationary deficit spending can destroy a nation. The renowned late economist, Milton Friedman warned that "Inflation is a disease, a dangerous and sometimes fatal disease that, if not checked in time, can destroy a society."

China remains the number one holder of U.S. debt. Milton Friedman warned, "The Fate of a Country Is Inseparable From the Fate of Its Currency." Climbing interest rates and inflation scare an already fragile domestic and global economy. As such, the debt onslaught is boosting bond yields as the appetite for money to finance the government's budget deficit shows no sign of dieting. - 23204

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