Early Foreboding: Foreign Holdings of Treasuries Fall

In what could be a negative foreboding for the US governments ability to continue to finance it's budget with Treasury securities, foreign holdings of US Treasuries fell, specifically holdings by China, which fell below that of Japan, leaving China as the second largest holder of US Treasuries. The obvious conundrum for the US Treasury is the threat of higher interest rates to continue to attract demand for it's securities at a time when the US's amount of outstanding debt is at an all time high. In turn, as Treasury's securities yields rise, these higher yields will ultimately be passed on to US consumers in the form of higher mortgage rates, credit card rates, auto loan rates, etc. at a time when the US consumer is continuing to strain from too much debt and must continue to deleverage.

What happens if rates start rising before the US consumer is prepared? Unfortunately, for many homeowners who have adjustable rate mortgages or two-step loans (loans that go from a fixed rate to an adjustable rate) higher rates may translate in to higher mortgage payments additionally limiting consumers discretionary income, meaning fewer car purchases and other purchases that will help sustain the US economy after the inevitable withdrawal of Federal stimulus.

Forcing the US government's hand?
The government has pledged to keep rates at exceptionally low levels for an extended period. This language has been incorporated in to the Feds policy statements for the past year. However, the Fed only controls short term rates, not long term rates. And those short term rates have been cut as low as they can go. Long term rates are moved by the market. As long term rates move higher, the yield curve steepens. While this is good for banks and financial institutions, at some point there must be a correction as depositors demand higher rates for their money, causing the yield curve to flatten.