US Treasury Bonds: A Case Study

Introduction to Treasury Bonds

Foreign governments take the action of buying government bonds from the USA Treasury for several reasons which will be described below. The Chinese model of appreciation management is different than that of many of the other key bond holders, so this will be looked at in more depth. Return and profit are other key reasons for buying any asset, such as a bond, which is a common motivator for other countries, such as Japan. If there is a decrease in the demand for USA bonds, this will effect the price of the bond, which will decrease.

If a bond price decreases and as part of the conditions of the bond, the interest rate payout is a fixed dollar amount, with a stated payout amount, the interest on the purchase

China, Japan, a group of Caribbean banks, a group of oil exporting countries and Brazil round out the top 5 top purchasers. On the opposite end of the spectrum, Denmark, Peru and Vietnam have the least amount of American bonds purchased. (Treasury.gov).

These countries are "holders of American debt”. Meaning the USA has issued out a product with an interest rate profit, for which the USA in return for receives capital from these countries, which will be used by the USA for other expenses. The purchasers become an owner of USA debt and help fund the USA’s continued spending on other things. Ironically, sometimes these other spending channels are imports, such as with China, and the money flows back into the Chinese economy.

Specifically, in the case of China, the Chinese government has an excess amount of US dollars. This is due to a trade surplus with the USA. China does not want individual businesses domestically to hold onto the USD they receive from payments of exports to the USA. As the companies and holders will soon enough want to buy local currency for their business needs. This would cause a demand increase for the local currency, which would make the Chinese yen appreciate, increasing its value and price. This causes appreciation against the USD which is bad for the export business. So governments in turn, buy back the USD from their domestic counterparts and

As demand decreases, the price would decrease and less money flow would be moving into the Treasury’s pocket. But this is not the real case at the moment, as the US Government is offering higher returns for USA bonds compared to other countries, especially those in the EU, such as Germany. The US dollar is seen as more stable than the Euro and many countries would rather buy US bonds. This in turn, increases price for bonds. Even with the recent sales of Chinese owned US bonds to stimulate the Chinese economy, economists are not worries demand for US bonds will decrease. As other country’s are looking for higher ROI and a stable market to invest