Foreign Ownership of U.S. Treasury Securities (Abridged)

Abstract

In 2004, for the first time, foreigners owned more than half of privately held U.S. public debt, mostly in the form of marketable U.S. Treasury securities. In internal discussions at the U.S. Treasury Department, the increase in foreign appetite for Treasury securities represented global investors' vote of confidence in the U.S. economy. Many in the Treasury believed that broad foreign ownership helped lower Treasury borrowing costs. But there was an increasing uneasiness among many in Washington's power circle about U.S. dependence on foreign loans. This case describes the meeting between the Treasury and the Treasury Borrowing Advisory Committee (TBAC) of the Bond Market Association on August 3, 2004, in which the Treasury gave the Committee the charge to discuss, among other issues, the level of foreign ownership. Written for a first-year course entitled "Global Economies and Markets," this case describes the market for U.S. Treasury securities, giving details on market institutions and market participants, and some of the reasons U.S. Treasury securities serve as benchmarks and hedging instruments. As the third case in the module on global markets, it is used to describe a market that is closest to the ideal of a perfectly competitive market and to illustrate the relationship between market institutions and structure on the one hand, and market liquidity and efficiency on the other.

Excerpt

UVA-F-1540

Foreign Ownership of U.S. Treasury Securities (ABRIDGED)

“Who will end up paying for Hurricane Katrina? Or for the war in Iraq? Or for any other spending that Congress chooses to authorize?”

—Floyd Norris, New York Times, October 1, 2005

Arriving at 11:15 a.m. on August 3, 2004, in the lobby of the Hay-Adams Hotel in downtown Washington, D.C., Timothy Bitsberger, dressed in a coat and tie, was glad to take shelter from the hot, humid air outside. As the U.S. Department of the Treasury's acting assistant secretary for financial markets, he was to meet with the Bond Market Association's Treasury Borrowing Advisory Committee (TBAC) at 11:45 a.m. in a closed session at the hotel. The TBAC, composed of senior representatives from investment funds and banks (Exhibit 1) and governed by federal statute, met quarterly with the Treasury Department to present its observations on the overall strength of the U.S. economy and to provide recommendations on technical issues on debt management. In addition to the usual technical issues, Bitsberger wanted the TBAC to discuss its views on increased level of foreign ownership of treasury securities.

Walking into the conference room, Bitsberger exchanged pleasantries with a few TBAC members who showed up early. He then turned his attention to readying his laptop for an opening presentation. One of the charts in his presentation would show that foreign holdings as a percentage of all privately held U.S. public debt had risen from 20% in 1993 to 50% in 2004 (Exhibit 2). In internal discussions at the Treasury Department, the increase in foreign appetite for treasury securities represented global investors' vote of confidence in the U.S. economy. Many at the Treasury believed that broad foreign ownership helped lower Treasury borrowing costs.

. . .

Keywords: Treasury Securities, Bills, Notes, Bonds, Efficient Markets, Liquidity, Foreign Ownership, Foreign Reserves, Reserve Management, Cost of Borrowing, Budget Deficit, National Debt