We have been hearing warnings for years. Just wait until China stops buying our debt… the borrow and spend cycle in the U.S. will come to a grinding halt. Since the Obama Administration has already spent about $1.4 trillion (~$800 billion on stimulus and ~$600 billion on a down payment for healthcare reform), these calls are growing ever more prevalent.
Of course, China will continue to have excess cash reserves that need to be invested, and they only own a fraction — less than 10 percent — of the total U.S. debt outstanding (contrary to the widespread belief that they effectively own the United States), but it is not unreasonable to think demand would drop a bit as we continue to borrow money. The interesting thing, however, is that demand for U.S. debt is showing no signs of slowing down.
Part of the reason the stock market is doing so well today (Dow up 150 with less than one hour of trading left to go) is because we got the results of yet another U.S. debt auction and it went very well. The U.S. successfully sold $27 billion of seven-year notes with strong demand.
Demand can easily be gauged by what is called the “bid to cover ratio” which simply tells you how many dollars of bids were submitted for each dollar of debt that was auctioned off. Today’s note offering registered a bid to cover of 2.82 so we received $76 billion of bids for only $27 billion of notes.
Are we paying through the nose for this money? Not exactly. The yield on the 10-year bond right now is around 3.5% or so. I wish I could borrow money for 10 years at 3.5%. Not only is the government trying to do so, but it is finding great success even in this fiscal environment. To me, that bodes well for the future of the United States.