Why is this not terribly reassuring?
Last week a newcomer moved to the top of the rankings for the world’s leading holder of U.S. Treasuries.
Used to be Japan, once upon a time. But Japan with holdings of $877 billion in U.S. Treasuries is now No. 3.
For a while China was the biggest holder of U.S. government debt. But now with $896 billion China has slipped to No. 2.
As of last week, the leader of the pack is—the envelope, please–the New York Fed, which holds the Federal Reserve’s Treasury bills, notes, bonds, and TIPs. (TIPS are Treasury Inflation Protected Securities.) As of last week the Fed’s System Open Market Account held $1,108 billion in U.S. government debt. (That’s $1.108 trillion if you prefer.)
And the Federal Reserve isn’t done building that portfolio. It’s still buying Treasury debt—about two-thirds notes with four-year to 10-year maturities—as part of the second program of quantitative easing and it is also buying about $30 billion a month to reinvest the interest from its portfolio.
By June, when the current program of quantitative easing is due to end, the Federal Reserve will hold about $1.6 trillion in U.S. government debt, or about as much as China and Japan hold now combined.
Which is kind of scary when you remember that the Federal Reserve will have to shrink its balance sheet one day. That will mean managing the sale of some part of the world’s largest portfolio of Treasuries without sending interest rates shooting up (and the U.S. dollar shooting down) as buyers demand higher yields if they’re going to swallow all that debt.
That sale should be especially tricky since there’s no evidence that the other big holders of Treasury debt—China, for instance—are eager to add to their already large portfolio holdings.