When will countries stop investing bonds issued by the United States? Probably never. Debt issued by the federal government offers the most stable investment return among debt securities issued anywhere. This is due mainly in part to the fact that the United States government has never defaulted on its debt obligations, even through tumultuous economic times. Foreign governments, particularly China, like to invest in U.S. debt as a way to bolster their own economies and experience economic growth.

What is U.S. Debt?

To continue answering the question regarding U.S. bonds, it is important to first define what federal debt is. U.S. government debt is issued in the form of bills, notes and bonds. These debt obligations are a promise to pay. Debt issued by the United States is the safest security instrument trading in the world.

It should be noted to allay any xenophobic fears that some may have about foreign ownership of U.S. debt that China and Japan hold a small percentage of the overall U.S. debt. China owns about $820 billion in U.S. debt and Japan another $10 billion, which is financed by bonds and other debt instruments. This number is 7-1/2 percent of the $11 trillion in U.S. debt.  

All Countries Carry Debt

Fears and concerns about U.S. bonds and the countries debt level should be balanced with the knowledge that all countries carry a certain level of debt that is financed with bonds to provide them with the long-term funding necessary to fund certain projects. Defense, transportation, space exploration and education are a few of the things that benefit from a stable and well managed debt system.

Why Countries Invest in U.S. Bonds

Countries like the safety and security found in investing in U.S. bonds. This investment helps to bolster their own currencies and since the overall amount of debt via bonds held outside the United States is small, poses little concern or danger to us. By and large many countries have already pulled back on their investment in U.S. Bonds as the Euro and other currencies have gained in strength. Faith in the U.S. dollar as compared to other currencies and issues and concerns with a particular country’s economy will drive the rate of investment or divestment in U.S. bonds.

Who Invests in U.S. Bonds

Large institutions such as banks, insurance companies and mutual funds tend to be the major buyers of U.S. Bonds. The guaranteed rates provided when buying a U.S. bond give these institutions the ability to support their own guaranteed on proprietary fixed products such as fixed annuities and certificates of deposit.

Look at the Chinese Economy

A sign that foreign investment in U.S. bonds is threatened will be a major recession or collapse of the Chinese economy. As one of the fastest growing emerging markets and the single largest holder of U.S. bonds, changes in the Chinese economy will have more a dramatic effect on the investment in U.S. bonds than any other event.

 

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