Biggest U.S. foreign creditors show concern on default risk

Bond Yields

Yields on Treasury three-year notes rose for a third day today as the U.S. prepares to sell $30 billion of the securities in the first auction of coupon securities since the government shutdown.

Treasury Secretary Jacob J. Lew said Congress needs to increase the debt ceiling by Oct. 17 or the nation risks defaulting on its payments. Lew is scheduled to testify before the Senate Finance Committee on Oct. 10.

Aso said he may discuss debt issues with his U.S. counterpart at a Group of 20 meeting this week.

President Barack Obama and Republicans remain locked in a fiscal stand-off. Senate Democrats are planning a test vote before the end of this week on a measure that would grant Obama authority to raise the $16.7 trillion debt ceiling, probably for a year unless two-thirds of both chambers of Congress disapprove.

Stand-off

In 2011, the last time Congress was gridlocked over the extension of the debt ceiling, the U.S. didn’t default on its debt. Republicans and Democrats reached a last-minute deal to raise the borrowing limit, though the posturing hurt consumer confidence and wiped out $6 trillion of value from global stocks.

The U.S. hasn’t defaulted since 1790, when the newly formed nation deferred until 1801 interest obligations on debt it assumed from the states, according to “This Time Is Different,” a history of financial crises by Carmen Reinhart and Kenneth Rogoff.

A default would be worse than the blow to the global economy from the collapse of Lehman Brothers Holdings Inc. in 2008, said Takatoshi Ito, the head of an expert panel advising Japan’s Government Pension Investment Fund, the world’s largest manager of retirement savings.

“I doubt we’ll see the U.S. fall into default on the 17th, but if it happened it would be worse than the Lehman shock,” Ito said last week in an interview. “I can’t imagine Japan and China would just sit there quietly taking losses on their foreign reserves.”

Dismissing Default

Pacific Investment Management Co. Co-Chief Investment Officer Bill Gross and BlackRock Inc. Chairman and Chief Executive Officer Laurence D. Fink, who oversee $5.76 trillion, dismiss the possibility of a default.

The $12 trillion of outstanding U.S. government debt is 23 times the $517 billion Lehman owed when it filed for bankruptcy on Sept. 15, 2008. The U.S. Federal Reserve is the biggest single holder of Treasuries, with $2.1 trillion worth as of Oct. 2.

Japan’s foreign exchange reserves were $1.21 trillion at the end of September, and China had $3.50 trillion in reserves at the end of June.

South Korea, Asia’s fourth-largest economy, pared the share of dollars in its foreign-exchange reserves 57.3% at the end of 2012 from 60.5% a year earlier, the central bank said in March. The nation had a record $337 billion in reserves as of the end of September.

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