Who Is Buying The U.S Debt and What Happens When The Fed Stops Buying It?

Who is buying the U.S. debt? You guessed right: the Fed. The Council of Foreign Relations has a couple of charts showing the data:



The chart above shows who bought the U.S. government issued in the first half of 2009. The total net issuance of treasuries and agencies is shown on the left side, while economic sectors are ordered from left to right by the size of their purchases.

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During the first two quarters of 2009, issuance has been financed mainly by "official" buyers, who often have motivations other than profit. The Fed is buying debt as a part of its quantitative easing program, while some foreign central banks are buying debt to control the rise of their currencies (please see our latest post on Brazil), i.e, as a function of their currency policy (or to control the current currency chaos).

The Fed said it plans to slow and stop its purchases by the end of Q1 2010. Who will then buy this debt? This will get extremely interesting. However, it will probably result in higher mortgage rates as the only way to attract buyers is to raise rates.

One of the reasons (and parhaps the main reason) of the Fed’s purchases was to cause a drop in mortgage rates during the crisis (and reducing costs of the GSEs, plus increasing the profits of Goldman Sachs and the other surviving banks who get to borrow at zero rates - free money).

Most analysts are forecasting rates will rise by at least 0.50% before the Fed stops buying and would then rise further afterwards.