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4 Mar, 2009 07:49

Russia buys up big on U.S. Treasuries, despite longer term doubts

Russia has become the 5th largest U.S. creditor, after upping its investment in U.S. Treasury bills to more than $116 Billion. But the deteriorating economic situation in the U.S may is leading to longer term concerns.

The United States keeps on printing money, creating trillions of dollars more debt. Other countries keep on buying US treasury bills, in order to bankroll the world's largest economy. Martin Walker, Senior Director at A.T. Kearney GBPC, says countries, including Russia, are buying them because they are the best asset available in the current environment.

“U.S. Treasury bonds are being bought by people all over the world, not because they are good returns but because they are the least bad assets around. You can’t put your money anywhere safer than that I think, so I think, moreover, it’s the most liquid asset around, the most easily sellable and tradable. So I think it’s a very useful one for Russia to have at the moment.”

Experts say U.S. Treasuries have no risk of default, as the United States is the only country in the world with a foreign debt denominated in its own currency. However Americas massive liquidity injections may lead to inflation, and cause creditor nations to lose interest in T Bills.

The biggest U.S. creditor, China, is talking about using its reserves to finance domestic economic development rather than continued purchases of buying U.S. Treasuries. Evgeny Gavrilenkov, Chief economist at Troika Dialog believes that over the longer term the attractiveness of T Bills is likely to wane.

“Investors may be gradually moving away from the dollar if there will be signs of further weakness in the U.S. economy. I believe that maybe we will see a situation in the U.S. similar to what was in Japan 10 year ago, 15 years ago. When they came into recession and this recession last for nearly a decade. In this situation zero returns from the U.S. Treasuries, will become less attractive for outside investors.”

But major foreign investors are unlikely to bail out of American T-bills immediately. That might trigger a huge loss in their value, slashing creditor's reserves.