When Will Countries Stop Investing In U.S. Bonds?

Investing in bonds offered by the United States government has always been considered a safe haven for large international investment firms and even sovereign national governments. United States bonds and treasury bills are considered to be some of the safest investment instruments in the world--because the United States government has always made good on bonds and treasury bills issued by the United States treasury.

However, as the rest of the world becomes less dependent on the United States for much of the purchasing of products manufactured in other countries, many international investors and governments are expanding their investment options and not concentrating so many resources into purchasing United States government securities.

Therefore, one needs to consider if countries will someday stop buying US bonds altogether.

Step 1 - Look for Lack of Confidence in the US Dollar

One reason that many countries have traditionally purchased US bonds and treasury bills is that the US dollar has always remained relatively stable and consistent in its value. While the dollar frequently fluctuates -- and sometimes by as much as 10 to 20% -- the US dollar has always been one of the most stable currencies in the world. Therefore, the US dollar is typically referred to as a safe haven currency.

The dollar and its value have been considered safe bets because of the confidence much of the world places in the ability of the U.S Government and the Federal Reserve Bank to keep the U.S Dollar at relatively stable levels.

Confidence in the ability of the U.S Government to repay debt helps keep the dollar stable, and a relatively stable dollar makes bonds sold in dollar denominations attractive investments for foreign investors.

If investors lose confidence in the dollar, its value will drop and the demand for U.S. bonds will decline.   

While there are times when a slightly weaker dollar will actually cause foreign investors to purchase more U.S Bonds (because of discounts afforded by a more favorable exchange rate), a weak U.S Dollar could cause foreign investors to avoid U.S bonds altogether due to concerns over further weakening of the dollar and huge potential losses in the investors home currency.

Step 2 – Look for the Collapse of Major Foreign Economies

Many economic experts speculate that the collapse of such of foreign economic powers such as China or Japan could cause a run on the US bond and Treasury bill market. Countries like China and Japan hold billions and billions of dollars in US debt. Furthermore, most of that debt is in the form of US bonds and treasury bills.

In fact, China is the thing is a single largest holder of US bonds and treasury bills in the world; therefore, should in the Chinese economy ever undergo a major recession or depression, the Chinese government may be forced to liquidate its holdings in US bonds and treasury bills. Should that happen, the resulting decrease in demand and over selling of bonds and treasury bills will more than likely drive the return rates of U.S. bonds and treasury bills to levels that no longer make them attractive to foreign investors.

Major worldwide market corrections or events could lead to US bonds or treasury bills suffering very low demand and causing the United States government to look for other sources of revenue. The United States government depends on the sale of US bonds and treasury bills to help finance almost every aspect of the government's work and to pay for infrastructure, employee salaries and other important services in American society.


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