China Isn't the Issue... Part II

Last week I detailed in China Isn't the Issue with regards to the United State's need for massive demand to take down all the new Treasury issuance:

We should be less concerned with China (they NEED to buy) and more concerned
that major investors continue to pile out.

Brad Setser with more evidence in money market space:

US money market funds holdings of Treasuries and Agencies rose by close to 350% in 2008, as their combined Treasury / Agency portfolio rose from from $392b to $1334b. That pace of growth of growth won’t be sustained. The large rise came from a low base.

But money market funds did hold more Treasuries and Agencies ($1357b) at the end of 2008 than China ($1233b) did.

Again, I am not arguing that China IS a major player (they are), but the marginal buyer over the past year that drove interest rates down to low (at times negative) levels were private investors. The key question to ask is what happens when they start to move back out along the risk spectrum? As Brad details, while the selling by foreign holders of Treasuries would have an impact:

So too could an end to the surge in Treasury demand from US investors …

Source: Federal Reserve