China s investment in US government securities and other sovereign debt will continue to yield extremely low returns.

The regulatory hybrid securities would have all the advantages of debt in normal times.

Along with roughly 700 billion in Chinese holdings of US agency debt (Fannie Mae and Freddie Mac), China s total 2 trillion exposure to US government and quasi government securities is massive by any standard.

Of the roughly 200 trillion in global financial assets today, almost three quarters are in some kind of debt instrument, including bank loans, corporate bonds, and government securities.

And the market is prone to temporary fits of shared enthusiasm for emerging market debt, for Internet stocks, for residential mortgage backed securities, for Greek government debt. Traders need not wait to see when or whether the profits materialize.

But, according to US Treasury data, China s holdings of US government securities totaled 1.16 trillion at the end of 2010, accounting for roughly 60 of the overall increase in foreign official holdings of US government debt.

But the safe haven status of US government securities is an illusion.

But such interventions inevitably translate into more holdings of US government securities.

But the ongoing depreciation of the US dollar which has fallen by almost half since the Bretton Woods system collapsed in 1971 together with the rising volume of US government debt, undermines the purchasing power of investors in US government securities.

By buying government securities, the central bank injects cash into the banking system.

For example, the US government should offer more financial instruments like Treasury Inflation Protected Securities (TIPS), thereby allowing China to convert some of its holdings of US government securities into similar but safer assets.

The Government Debt Bomb

It winds up borrowing temporarily with short term debt then, as borrowing accumulates, it is refinanced with longer term securities.

When Is Government Debt Risky?

BEIJING Despite shaky economic fundamentals, US government securities are usually regarded as a safe haven.

If interest rates on US Treasury securities were high and rising rapidly as the debt grew, I would agree with this argument.

The U.S. Securities and Exchange Commission (SEC) is an agency of the United States federal government.

Since then, emerging market currencies and fixed income securities (government and corporate bonds) have taken a hit.

Indeed, the objects of such speculation astound the imagination tulip bulbs, gold and silver mines, real estate, the debt of new nations, corporate securities.

Investment banks then earn fees for re packaging these securities in tranches of collateralized debt obligations, or CDO s (and sometimes into CDO s of CDO s).

Even so, the explosion in the quantity of collateralized debt obligations and similar securities went far beyond what was needed to sustain mortgage lending.

Government debt The ratio of gross government debt to GDP must not exceed 60 at the end of the preceding fiscal year.

A year ago, it vowed to stop accepting BBB rated government securities as collateral for its monetary operations.

What we do know is that China should have begun exiting gradually from US government securities long ago.

Through financial intermediation, these government securities helped finance the western consumption and speculative boom that collapsed in 2008.

The investment banks blended these securities into asset backed securities and collateralized debt obligations (CDOs) and sold them on to financial institutions throughout the world. These institutions, attracted by the high rates of return that were promised, invariably neglected the downside risks.

Interest rates on government debt are still low.

Insecure Securities

Moreover, the US government provides a very good inflation hedge in the form of Treasury Inflation Protected Securities (TIPS).

At the end of 2011, China s central government debt amounted to 16.5 of GDP, and overall government debt totaled 18 trillion, or 38 of GDP.

Budget deficits automatically increase government debt, requiring higher future taxes to pay the interest on that debt.

The prices of structured securities such as collateralized debt obligations have come down, because the institutional fraud of a multi fold chain of securitizations has been detected.

Finally, if the US government cannot safeguard the value its securities, it should compensate China in one way or another.

By contrast, the return on US government securities, which form the bulk of China s foreign assets, was next to nothing.

Securing Synthetic Securities

(ii) Securities Act

Markets encourage the required debt discipline in a timelier manner by charging higher interest rates on government debt.

The ECB has lowered the threshold of creditworthiness that Greek government securities must meet in order to allow continued Greek borrowing.

In 2011, local government debt totaled 10.7 trillion ( 1.7 trillion), with only 54 of more than 2,500 county governments debt free. Debts incurred by local government investment vehicles (LGIVs) totaled almost 5 trillion 46.4 of overall debt.

Debt relief created fewer problems for banks in the US because a significant proportion of the subprime loans packaged into AAA rated securities had been sold to gullible foreigners.

But the adequate servicing of the debt and, therefore, the performance of the securities, were based on expectations of continued rises in housing prices that proved to be unrealistic.

a transaction involving securities

BEIJING The market for United States Treasury securities is one of the world s largest and most active debt markets, providing investors with a secure stock of value and a reliable income stream, while helping to lower the US government s debt servicing costs.

The Bundesbank has stated that it will no longer accept bank securities as collateral from banks that have undergone a government recapitalization.

That expected inflation rate is consistent with the difference in interest rates between ordinary US government bonds and Treasury Inflation Protected Securities.