Fed Passes China to Become Largest U.S. Creditor

The Federal Reserve has surpassed China as the single largest creditor of the U.S. government.

UniCredit’s Chief U.S. Economist Harm Bandholz is out Thursday with the details:

As a result of its asset purchase program (QE2), the Federal Reserve at the end of 1Q held about 14% of total outstanding federal debt (debt held by the public). It is, therefore, now the single-largest creditor of the US government.

According to separate data from the Treasury Department, China is ranked second. It owned in late March Treasuries worth USD 1,145bn, which is slightly less than 12% of the total amount outstanding.

After the Fed and China, the biggest holders of U.S. debt are

the household sector
Japan
state and local governments
and private pension funds.
In addition:

By the end of this month, the Fed will have boosted its Treasury holdings by another USD 250bn (annualized 1tr), and will own about 16% of all outstanding Treasuries (not to mention the 15% of GSE mortgage-backed securities)…

As QE2 ends in three weeks, the critical question remains, “who will buy them thereafter?” We think that private households and foreign investors, who have both been very cautious in recent months, will ramp up their Treasury purchases again. But they might ask for higher yields than the US central bank did.

Bond bulls beware!