The Line Outside Uncle Sam's Debt Store

By MARK GONGLOFF This week will bring fresh evidence of demand for government debt, starting Wednesday with Treasury International Capital, or TIC, data for July, tracking the flow of money across U.S. borders. On Thursday, the Federal Reserve releases flow-of-funds data, tracking the balance sheets of U.S. households, corporations and the government, for the second quarter. Both will include measures of foreign and domestic appetite for Treasurys. The question is of special concern as the U.S. government borrows heavily to pull the economy out of recession -- according to some estimates, nearly $2 trillion in fiscal 2009, which ends this month, and perhaps $1 trillion in fiscal 2010. Many investors worry that Treasury prices will plunge under the weight of this supply, pushing interest rates -- which move in the opposite direction -- higher and wreaking economic havoc. But so far, demand has kept pace. According to TIC data, foreigners, including private investors and central banks, bought a net $207 billion in long-term Treasurys in the first half of 2009, up from $110 billion in the prior six months. U.S. households held nearly $644 billion in Treasury debt in the first quarter, up from $267 billion in the prior quarter, per the latest Fed flow-of-funds data. Healthy demand has helped keep Treasury yields flat despite deficit worries and improving economic data. The 10-year Treasury note yielded 3.45% on Tuesday, roughly unchanged from a year ago when the heaviest government borrowing began. One reason investors keep buying Treasurys could be that the spread between 10-year yields and inflation -- the "real" interest rate -- is the highest since the 1980s, according to CRT Capital Group bond strategist David Ader. That suggests bond buyers are getting a chunky inflation buffer. Nevertheless, traders still are betting against long-term Treasurys. Last week, twice as many futures speculators bet Treasury prices would fall as bet prices would rise. A year ago, long bets outnumbered short bets. Treasurys have withstood what could be the worst of the supply storm. Those expecting a Treasury collapse might wait a painfully long time for payoff. Write to Mark Gongloff at mark.gongloff@wsj.com