China and Japan have been reducing their purchases of US government securities, while US and (presumably) foreign banks have been increasing their holdings.

Since the beginning of the recession, banks have bought about $300 billion of Treasuries and reduced commercial and industrial loans by about $350 billion. Foreign purchases as of January were still running at a $60 billion monthly rate in January–about $195 billion during the last three months for which we have data. That’s an annual rate of nearly $800 billion, or about half the Treasury’s annual borrowing requirement.

But the demand came not from foreign central banks, but rather from “other foreigners.” Most of this reflects use of the carry trade by foreign banks, or hedge funds, who are doing exactly what the American banks are doing: borrowing at 0.25% from central banks and lending it back to the US government at 1% or 2%, depending how far out the curve they go. The demand isn’t not coming from the oil exporters, who appear to be net sellers. On a geographic basis, the main buyers are “United Kingdom” and the “Caribbean,” that is, banks and hedge funds.

Raise rates and the carry trade comes crashing down. And so does the Treasury market and the mortgage market and the US economy. The Fed is stuck with loose money just as the Bank of Japan was during the 1990s, and for the same reasons.

               TOTAL                                    INTERNATIONAL
                     NET          FOREIGN                         AND
                   FOREIGN        OFFICIAL       OTHER         REGIONAL
     MONTH        PURCHASES     INSTITUTIONS   FOREIGNERS    ORGANIZATIONS
     -------   ---------------  ------------  ------------  ---------------

     2010-01            61,392           558        60,709              125
     2009-12            69,944        21,977        48,060              -93
     2009-11           117,880        31,184        86,638               58
     2009-10            38,910        15,043        23,745              122
     2009-09            44,685        18,966        25,120              599
     2009-08            28,057        13,183        15,506             -632
     2009-07            31,252        15,721        14,854              677
     2009-06           100,499        22,498        77,604              397
     2009-05           -22,576       -21,763          -368             -445
     2009-04            41,969        17,125        24,864              -20
     2009-03            55,241        29,026        26,675             -460
     2009-02            21,735        -1,959        23,786              -92
     2009-01            10,924        -1,940        12,899              -35
     2008-12            14,584         3,851        11,436             -703
     2008-11           -25,784       -26,204          -139              559
     2008-10            32,872        -1,084        34,476             -520
     2008-09            20,116         4,944        14,896              276
     2008-08            32,837         4,848        28,192             -203
     2008-07            34,012        10,068        24,312             -368

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