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The Fed Out-Gobbles Foreigners for U.S. Debt

Ron DeLegge

In case you never got the memo, the Federal Reserve's monetary policies are skewing asset prices everywhere.

You know, $22 billion market caps for profitless publicly traded companies (see Twitter), $52 million for vintage Ferrari GTO's, and $142 million contemporary paintings at the auction block. But this time is different, so we've been told and the world scene is in much better shape than before.  

The Fed's biggest footprint has been on the U.S. Treasury market (TLT - News), where it voraciously consumes Treasury bonds like a reality show version of PAC-MAN. 

In September, foreign holdings of U.S. Treasury (^TYX) debt rose 1% to a total $5.65 trillion. How does that figure compare to the Federal Reserve's current Treasury holdings?

In early 2009, the Fed's Treasury holdings held just $474.64 billion. That was right around the time when quantitative easing (QE) began ramping up. Fast forward to today. The chart above shows how the Fed's Treasury holdings have more than quadrupled to $2.13 trillion from four years ago. How does that compare to the largest foreign owners of U.S. debt? 

The Fed's current Treasury holdings (^TNX) easily surpass China's $1.29 trillion and Japan's $1.17 trillion purse, making it the globe's largest holder of U.S. government debt.

Meanwhile, the 10-year yield is up almost 70% over the past year despite uninterrupted QE. And if you've been long Treasury bonds, particularly with durations greater than 10 years, the trend hasn't been your friend. 

Furthermore, higher interest rates are a serious threat to both rate sensitive sectors (VNQ - News) and the broader economy. When the cost of servicing debt rising, it puts more pressure on borrowers.

Nevertheless, Janet Yellen - the nominee to lead the Federal Reserve - said she doesn't see any "bubble-like conditions" in the stock market (SCHB - News), bond market (AGG - News) or elsewhere. Given the historical propensity of Fed officals to miss nuclear bombs hidden in plain sight, Yellen's view is sinisterly apropos.

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