Financing U.S. debt: Is there enough money in the world – and at what cost?

This paper examines the potential role for foreign official holdings of U.S. Treasury securities and the associated implications for Treasury security interest rates, international portfolio allocations, net international income flows, and the U.S. net international debt position, using a baseline outlook of current and projected U.S. budget deficits and growing debt. The analysis applies empirical results regarding the role of U.S. structural budget deficits, and foreign official and Federal Reserve holdings of U.S. Treasuries, in determining Treasury security interest rates. Although initial review of information suggests that the world portfolio could potentially accommodate financing requirements over the intermediate horizon and mitigate interest rate effects, substantial uncertainty remains about the relationships among foreign official holdings, exchange rates, and trade; the potential effects of “crowding out” in the international portfolio; and how and whether world portfolio allocations would adjust to accommodate higher shares of U.S. assets.