US Treasury Supply Continues

The US Treasury will auction a record $123 bln of notes and bonds this week, adding to the $1.1 trillion net sales already this year. It is interesting to review who is buying all this paper.

There are four groups that account for the lion's share of Treasury purchases this year. The first group to note are American households and domestic hedge funds. They held about $240 bln in US Treasuries at the end of 2008 and at the end of Q2 held $606 bln. This is an increase of $366 bln.

The second group of central banks. We use as a proxy, the Federal Reserve custody holdings for foreign official accounts. At the end of last year they held $1.699 trillion and as of last week custody holdings of Treasuries stood at $2.124 trillion, an increase of about $425 bln.

The third large buyer is the Federal Reserve itself. It will complete its $300 bln purchases later this week.

The fourth group are the large US commercial banks. Last year they were net sellers of about $23 bln in US Treasuries. This year, through mid-Oct they have bought about $80 bln.

Treasury Purchases

US households and hedge funds: $366 bln as of end of Q2

Fed Custody Holdings: $422 bln as of last week

Federal Reserve: $300 bln as of end of Oct

Large US Commercial banks: $80 bln as of end of Q2

Total: $1.168 trillion

Some of the bank demand for US Treasuries may be in preparation of new capital requirements that are expected.

The average maturity of US Treasury debt is a little more than 4 years currently, near a 26 year low. The US Treasury has indicated that it will lengthen this and is expected to move toward 6 years. This will likely take place by replacing bills with bonds.