Foreign Ownership of U.S. Treasury Securities

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 the 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. The case has also been used in the module on open economy in Darden's first year MBA program. In this usage, it is generally preceded by a case that introduces the concept of real exchange rate and economic exposure to foreign exchange risks, and a discussion on balance of payments accounting. This case (UVA-F-1477) or the abridged version (UVA-F-1540) is then used to introduce the model of a large open economy. The case is usually followed by classes on exchange rate determination, exchange rate regimes, and balance of payments crises.

Excerpt

UVA-F-1477

Foreign Ownership of U.S. Treasury Securities

“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 leave 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 observations on the overall strength of the U.S. economy and to provide recommendations on technical issues on debt management. Bitsberger wanted the TBAC to discuss their views on the following issues:

1. reducing marketable issuance in the face of declining financing needs and the impact of such reductions on market liquidity

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Keywords: treasury securities market liquidity efficiency perferct competition open economy, international macroeconomics, market for loanable funds, savings, balance of payments