In the trouble-tossed world of finance, America's vast and liquid
Treasury-bond market was considered a safe and attractive place by
many. For years, it was attracting loads of money from China, Japan, UK,
Saudi Arabia and many other oil-exporting countries. In a way, it has added to
US's total debt to the world, which stood at nearly $78.8 tn at the end of
February 2009 and exceeds the total world GDP. America, being a prolific spender,
has largely benefitted from its Treasury bond market. It used to finance its
expenditure from the proceeds from this market. It thus helped the American market to
prosper all these days. However, the credit crunch and the downfall of its
banking system have exposed the US's trillion dollar debt and certain flaws in
managing that debt through its treasuries.
Obama's new budget has projected a deficit of nearly $1.75 tn, (the
figure represents 12.3% of GDP, double the post-war record of 6% in 1983 and
the highest after it totaled 21.5% of GDP in 1945 at the end of World War II),
which he is planning to finance through the Treasury-bond market. The
stimulus package and the bank bailout plans announced by the US Treasury
Secretary, Timothy Geithner indicated his interest in selling more bonds this year,
further enhancing the Treasury's existing debt of over $6 tn. Analysts are of
the view that this proposal is likely to increase the Treasury borrowing by
$3.7 tn in 2009 and 2010, and may go even higher. The decision was therefore
not well received by the Treasury bond market. Since touching a record low
of 2.04% in mid-December, 10-year bond yields shot up to 3.04% by the end
of February 2009, pushing their prices to record lows.
Similarly, the yields on 30-year bonds rose from
2.5% to 3.75%. Heavy selling of these bonds made January 2009 the worst month for
US government securities in decades. The Treasury bond market has lost
3.6% this year, their worst annual start since 1986.
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