No surprise, Fed was biggest buyer of Treasurys in 2013
The Federal Reserve financed most of the U.S. government’s deficit in 2013, in sharp contrast to the year before, when the Fed did not add to its holdings of Treasury securities. The U.S. private sector appears to have been a net seller of Treasurys in 2013, but the foreign private sector was a substantial buyer, according to government estimates.
In 2013, the government issued a net $759 billion in Treasury securities to the public. That was the lowest figure in six years, as the budget deficit declined because of a healthier economy, which increased tax receipts, and to government austerity that cut spending.
The Fed bought a net $543 billion of Treasurys during 2013. That was not a record amount — in 2011 it had purchased $656 billion — but it enabled the Fed to finance 71 percent of the net Treasury borrowing during the year. That was the highest proportion since the government resumed running deficits in 2002. The 2011 purchases amounted to 61 percent of the money the government borrowed that year.
The Fed has begun “tapering” its purchases of Treasury securities, as it grows more optimistic about the economy. If it continues on that course, purchases in 2014 are likely to be considerably lower than in 2013. In general, the Fed does not directly finance the Treasury by purchasing newly issued securities. Instead, it buys in the open market. But the net impact is the same.
While the Fed was stepping up buying, China — the largest foreign creditor of the United States — slowed its purchases, according to U.S. Treasury estimates of international capital flows. The Treasury estimated that China bought a net $48.5 billion in Treasury securities in 2013, $20 billion less than it bought in 2012. Japan replaced China as the largest foreign investor, buying $71.3 billion in Treasurys, up from $53.1 billion in 2012.
Those figures include both private and public sector purchases, although in China, the figures are presumably overwhelmingly from the public sector.
In total, the government estimates that foreign private investors purchased a net $198.9 billion in Treasury securities, while public agencies, including central banks, bought only $22.2 billion in those securities. If China’s purchases were primarily by the government, that would indicate that other governments around the world were net sellers.
It is unusual for private foreigners to be more enthusiastic than foreign governments about Treasurys. The last time that happened was in 2005. That year, Japan became a net seller of Treasurys for the first time in three years, having halted dollar purchases that were viewed as a way of seeking to keep the yen from rising too high relative to the U.S. currency.
China is estimated to own $1.27 trillion in Treasurys, and Japan to own $1.18 trillion. Between them, they control 42 percent of the $5.8 trillion held by foreigners.
Long-term Treasury yields began to rise in 2013, as the U.S. economy seemed to strengthen. That led some U.S. financial institutions to avoid such securities, whose market values will decline if rates continue to go up. Overall, the American public, including banks as well as private investors, is estimated to have reduced its holdings of Treasurys by $4.7 billion in 2013.
If that is accurate, and its accuracy depends in large part on the Treasury’s estimates of foreign transactions, which can be subject to substantial revisions, it would probably indicate that it was banks, not individuals, who were net sellers of Treasurys. The Federal Deposit Insurance Corporation reports that during the first nine months of the year, banks and savings institutions collectively reduced their Treasury holdings by about $46 billion.