This is probably the most common question clients and market contacts have been asking.  The size of the US budget deficit is mind boggling.  There is great concern that the supply will overwhelm demand. The US government is expected to sell a record of $2.5 trillion of paper this year, according to some estimates. Although last week’s record size note sale was fairly well received and the new buyers have been greeted with instant gratification as the larger than expected downward revision to Q4 data and anticipation of another horrible US employment report on Friday, coupled with additional steep equity losses have bolstered prices.

One group of likely buyers of US Treasuries that is not fully appreciated by market participants, who have focused on international demand, are Americans themselves.  The household savings rate is trending higher, the current account deficit is trending lower, and investors have been terribly burnt by the equity market.  Investors are all stripes may be attracted to the security of the US Treasury market.

US individuals owned a little less than $90 bln of US Treasuries as of the end of Q3 08 and have increased their holdings for each of the first three quarters of 2008.  Mutual funds held by individuals, including non-Americans, held about $155 bln of Treasuries as of the end of Jan, a 16% increase in the past year, according to Morningstar Inc. 

US Treasuries returned 14% last year, according to industry benchmarks, the best since 1995.  Although we are still waiting for tabulations from last month, in January, investors bought more than $11.5 bln of taxable bond funds, including Treasuries, vs $4 bln for equity funds, according to the Investment Company Institute.  In January 2008, the Investment Company Institute reports that taxable bond funds took in $12.3 bln and equity funds pulled in $29.3 bln.