Foreign holdings of US debt hit $5.46 trillion

[November 17, 2012]  WASHINGTON (AP) -- Foreign demand for U.S. Treasury securities rose to a record level in September for the ninth straight month. The increase suggests that overseas investors are confident in U.S. debt despite a potential budget crisis.

The Treasury Department said Friday that total foreign holdings rose to $5.46 trillion in September, up 0.1 percent from August.

China, the largest holder of U.S. government debt, barely increased its holdings in September to $1.16 trillion. Japan, the second-largest, increased its holdings to $1.13 trillion. Brazil trimmed its holdings to $267 billion.

Investors continued to buy U.S. Treasurys even as lawmakers and President Barack Obama remained at odds over whether to raise the U.S. borrowing limit as part of a broader budget deal. Private economists predicted that demand for U.S. debt will continue in coming months, given worries about the European debt crisis.

"We expect that foreign investors are now piling back into the safety of U.S. debt and shunning equities," said Paul Edelstein, director of financial economics at IHS Global Insight.

The federal government is expected to hit its current borrowing limit of $16.39 trillion by the end of December. Treasury Secretary Timothy Geithner has said he will resort to the same maneuvers he used in the last debt standoff in 2011 to keep the government from defaulting on its debt. But these operations will buy only a few weeks' time until late February or early March before the government will face the prospect of a first-ever debt default if Congress doesn't raise the debt ceiling.

After the last debt standoff in the summer of 2011, Standard & Poor's downgraded the government's credit rating on long-term securities one notch from the highest level of AAA to AA+. It was the first ever downgrade of U.S. government debt.

Last week after the presidential election, Fitch Ratings said Obama will need to quickly come to a budget agreement with Congress over the so-called fiscal cliff or risk losing the AAA rating Fitch has on U.S. debt.

The fiscal cliff refers to the collection of tax increases and spending cuts scheduled to take effect in January unless a deal is reached. Economists have warned that the U.S. economy will be pushed into a recession next year if the fiscal cliff is not averted.

Obama met at the White House on Friday with congressional leaders as negotiations over the fiscal cliff began in earnest. Obama said "tough compromises" would need to be taken.

[Associated Press; By MARTIN CRUTSINGER]

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