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The Bond Check-In

Lots of concern the last few weeks over sovereign debt.

Investors globally were wondering how Greece would fund its budget shortfalls. Now we're looking at how Europe is going to come up with the money for its proposed $1 trillion bailout announced this week.

To get some idea, take a look at how America is doing funding its stimulus-induced deficit.

Yesterday, the U.S. government released its Monthly Treasury Statement. Giving us the most up-to-date view of America's budget and financing situation.

So far in fiscal 2010 (which began in October 2009), America has run a deficit of $800 billion. Almost exactly the same as the U.S. racked up from October to April of the last fiscal year.

The critical question: how is America doing financing this shortfall?

Pretty well, actually. So far in FY2010, Americans have purchased $882 billion in Treasury bonds. Government agencies have bought a further $156 billion. And foreign buyers have picked up $336 billion.

Purchases of US Treasuries

All told, these investors have leant the U.S. government $1.375 trillion to finance the nation's supercharged deficit spending. In fact, domestic bond purchases alone have been enough to finance this year's $800 billion shortfall. (For anyone wondering, purchases of Treasuries by the Federal Reserve made up just a very small portion of this buying. About $10 billion.)

This is an interesting development. Americans are stepping up and buying Treasuries like never before. As the chart below shows, up until 2007 America relied largely on foreign bond buyers, who consistently accounted for between 40 and 50% of total Treasuries purchased.

US Bond Sales - Foreign Buyers

That's changed since the onset of the financial crisis. In fiscal 2009, foreigners accounted for just 10% of the $2.1 trillion in total bond purchases. So far in FY2010 foreign buying has been a little stronger, but these buyers still only account for 25%. Well below the average for the past decade.

Of course, there are still a number of issues facing the U.S. government. Debt service payments are rising. Through the first seven months of fiscal 2010, America paid $224 billion in interest on its debt. Up from $193 billion for the same period in FY2009.

The bigger challenge is that all of these bonds will need to be redeemed at some point. Which means America either needs to "roll" the debt by selling more Treasuries, or start running surpluses. The latter looks unlikely for the next several years.

But for the moment, bond buyers appear content to continue lending money to the world's largest economy. Something to consider for anyone betting against America and the dollar.

By. Dave Forest of Notela Resources

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