Historically, investors bought US treasuries on account of following reasons:
- Stable political system
- Possible favorable returns
- Dominance of dollar as a global currency
- Known as the largest treasury market in the world
- Higher liquidity
It is known that the other bond markets trade against the benchmarked US Treasury rates. In addition to above mentioned reasons, there are many other reasons to invest in US treasury. For example, China buys US bonds to depress or reduce the value of Yuan, China’s currency. A cheaper Yuan would make China’s exports less expensive for foreign buyers, thus helping the export-based economy to prosper. China generates a huge amount of dollar earnings through its trade with the US; which China invests in the US Treasury market. Due to the size of the US treasury market, China has chosen US to make investments. If China were to invest in treasury markets of smaller nations, the impact of its buying would be enormous, disrupting the entire market. Japan which is the second largest investor in the US treasury also engages in a lot of trade activities with the US. China and Japan are the largest holders of US treasuries, their combined total holding value exceeding $2 trillion and both are globally known as exporters of finished goods.
The US fiscal debt 2013 for twelve months ending September 30 was about $420 billion. The size of the US debt is approximately $16.74 trillion as of October 2013. It is obvious that shutdown brings panic among the countries which invest in the US Treasuries. Since China holds such huge investment in the US treasury market, it has a vested interest in maintaining the health of the US Treasury market and ensuring safety of its investments.
According to Ratings firm Standard & Poor, the US economy has already lost $24 billion during the shutdown, which has been borne by the commoners. The world has lost faith in the American dollar as the world’s reserve currency. IMF has proposed that in order to take the government’s debt level back to the 2007 level of about $30 trillion, a capital levy tax of 10 percent on all households should be levied. This move is expected to restore debt sustainability, and will have huge consequences on government treasuries and taxpayers all over the world. Capital levy taxes have been imposed in the past, but were unsuccessful, as the general public opposed to such taxes. This also leads to inflation and reduces the currency value. IMF feels that according to the situation, the need for such a move is warranted.
The top investors in the US Treasury have been listed below:
Fig 1: Top Countries Investing in the US Treasuries – July 2013 ($US billion)
The total investment has been approximated as $5590.1 billion as per the report. Here is a case study on the impact in India which is standing as a comparatively lesser investor in the US Treasury.
What is the Impact of Shutdown on India?
The following chart represents change in the value of USD vs. INR. Overall, it appears that India has gained on account of exchange rate by securing a marginal gain in its exchange value. The chart below shows the rupee trading in the range of INR 60 per USD to INR 62 per USD during the fourteen day period. The rupee has gained from INR 62.4491 per USD recorded on 1st October, 2013 to INR 61.3477 per USD on 14th October, 2013. This shows that the shutdown had a marginal positive impact on the rupee.
Fig 2: Pattern of INR value change vis-à-vis the USD
India has witnessed an increased Foreign Institutional Investors (FII) activity. FII were net buyers of Indian shares in September 2013, which is continuing in October 2013 as well. The below chart shows that on the 1st day of the shutdown, FIIs were net sellers. Thereafter, till 11th October, the chart is showing a more or less upward trend. FIIs were net buyers during the period 1st October 2013 to 11th October 2013.
Fig 3: FII activity in India (Equity) – Net Investment (USD million)
However, the following data shows that the above FIIs turned out to be the net sellers during the period 1st October 2013 to 11th October 2013.
Fig 4: Pattern of FII activity in India (Debt) – Net Investment (USD million)