NEW YORK — The Federal Reserve financed most of the government’s deficit in 2013, in sharp contrast to the year before, when the Fed did not add to its holdings of Treasury securities. The American private sector appears to have been a net seller of Treasurys in 2013, but the foreign private sector was a substantial buyer, according to government estimates released this week.
In 2013, the government issued a net $759 billion in Treasury securities to the public. That was the lowest figure in six years.
The Fed bought a net $543 billion of Treasurys during 2013. That was not a record amount — in 2011 it had purchased $656 billion — but it enabled the Fed to finance 71 percent of the net Treasury borrowing during the year. That was the highest proportion since the government resumed running deficits in 2002. The 2011 purchases amounted to 61 percent of the money borrowed that year.
The Fed has begun “tapering” its purchases of Treasury securities, as it grows more optimistic about the economy. If it continues on that course, purchases in 2014 are likely to be considerably lower than in 2013. In general, the Fed does not directly finance the Treasury by purchasing newly issued securities. Instead, it buys in the open market. But the net impact is the same.
While the Fed was stepping up buying, China slowed its purchases, according to US Treasury estimates. The Treasury estimated that China bought a net $48.5 billion in Treasury securities in 2013, $20 billion less than in 2012. Japan replaced China as the largest foreign investor, buying $71.3 billion in Treasurys.
Those figures include private and public sector buys, although in China, the figures are presumably overwhelmingly from the public sector.
In total, the government estimates that foreign private investors purchased a net $198.9 billion in Treasury securities, while public agencies, including central banks, bought only $22.2 billion. If China’s purchases were primarily by the government, that would indicate other governments were net sellers.
It is unusual for private foreigners to be more enthusiastic than foreign governments about Treasurys. The last time that happened was in 2005.
Long-term Treasury yields began to rise in 2013, as the US economy seemed to strengthen. That led some US financial institutions to avoid such securities, whose market values will decline if rates continue to go up. Overall, the US public is estimated to have reduced its holdings of Treasurys by $4.7 billion in 2013.