I’ve been taking a look at what happened to the demand for U.S. Treasury bills and bonds as a result of the financial crisis. Here’s a summary of some of the data that I found interesting.
The Federal Reserve publishes flow of funds accounts that include estimates of who has been holding the debt issued by the U.S. Treasury at different points in time. Here’s a pie chart showing the breakdown as of the end of 2007. At that time, almost half of the U.S. Treasury debt was owed to people or institutions outside the United States. The Federal Reserve and state and local governments held another quarter. Pension funds (combined private and federal, state and local government), mutual funds, and money market funds held another 15%. U.S. households played a very minor role in lending to the U.S. government, with holdings of only about 5% of the total debt.
U.S. Treasury securities held by different sectors as of December 31, 2007. Data Source: Flow of Funds, Table L.209.
In the two years since then, U.S. Treasury debt has increased more than 50%. The chart below summarizes who bought all that new debt. Foreigners bought more than half of the net new debt issuance. But the Federal Reserve and state and local governments have barely increased their holdings of Treasury debt at all, meaning that other sectors significantly increased their share. In particular, money market and mutual funds increased their holdings of Treasury debt by 85% over the last two years. Banks increased their holdings by 146%, and households by 143%.
Change in holdings of U.S. Treasury securities between December 31, 2007 and December 31, 2009. Data source: Flow of Funds, Table L.209.
The biggest single factor in that willingness of foreigners, mutual funds, banks, and households to increase their holdings of Treasury securities is a flight to quality– people wanted out of risky assets and into something they regarded as safe. But, unless financial conditions deteriorate further, I wonder why there would be a similar increase in demand for Treasury debt over the next two years. And, if things ever improve, one would expect some of those holdings to move back into higher-paying assets.
So I can see who bought the $2.7 trillion in net new Treasury debt issued between 2007 and 2009. What I’m having more trouble seeing is who is going to buy the additional $8 trillion in net new debt that would be issued over the next decade under the CBO’s alternative fiscal scenario.