US mortgage fears over foreign debt

Cash-strapped US homeowners could face higher mortgage payments if two of Asia's biggest economies continue to reduce their holdings of American securities. "If this were to continue, if China were to stop recycling its dollars into US treasuries, it could have dire implications for Main Street America in that mortgage rates could move higher," said Chris Rupkey, the chief financial economist at Bank of Tokyo-Mitsubishi in New York.

China and Japan are two of the biggest foreign holders of US treasuries. In January, both reduced their holdings of US government debt as a measure of demand for American financial assets fell to a six-month low. But China remained the biggest owner abroad of Treasuries, even as its holdings dropped by a net US$5.8 billion (Dh21.3bn) to $889bn, Treasury department data released yesterday showed. Japan cut its holdings in January by $300 million to $765.4bn, the report showed.

China has been a net seller of treasuries for three straight months, the longest such stretch since the end of 2007. Chinese officials have questioned the dollar's role as a reserve currency and recently sought assurances about the safety of US government debt as the budget deficit widened to a projected record $1.6 trillion this year. International buying of long-term equities, notes and bonds totalled a net $19.1bn, compared with net purchases of $63.3bn last December, the report showed. That was the smallest net gain in purchases since July.

Economists in a Bloomberg News survey projected long-term US financial assets would show a net increase of $47.5bn in January, according to the median of four estimates. Including short-term securities such as stock swaps, total investment flows show foreigners sold a net $33.4bn after net buying of $53.6bn the previous month. The Chinese premier Wen Jiabao this week sought assurances that the US will protect the value of China's dollar assets.

Economists said that selling by China and Japan might be temporary as the world's largest economy rebounds from recession and as concern lingers about government debt of EU countries such as Greece. "In the short haul, there is no need for alarm as portfolio changes often occur at the start of the year," Mr Rupkey said. "The US will continue to see renewed inflow later this year as its economy remains a relative oasis of calm now that other sovereign credits are experiencing troubles with debt loads."

In Japan, analysts said the government was prodding the Bank of Japan to ease its already ultra-loose policy to weaken the yen, hoping that will boost exports and offset deflation. * with Bloomberg and Reuters