Barry Ritholtz meditates on the conundrum:
The Big Picture: In Long-Term American Treasury Securities They Trust : What does it mean when so many overseas investors -- governmental, corporate, and institutional -- are hungry for US paper? There are a variety of potential explanations: Yield is relatively attractive here, its a safe investment for those looking to move cash away from their native countries. For exporters, buying US Treasuries helps pressure rates down, thus financing additional consumer spending. Floyd Norris writes: "The vast majority of foreign Treasury purchases came from private foreign investors, who presumably were attracted by the yields and by the fact that the dollar gained in 2005 against the Japanese yen, the euro and the British pound, while falling less than 3 percent against the Chinese yuan."
The United States is politically stable (despite red/blue divisions); Nor does it hurt that we have an unblemished track record of paying our sovereign debts -- even with all of the economic imbalances of recent years or the past....
Here's the details, via Norris: "GUESS who's financing the budget deficit of the United States? Hint: Very few Treasury securities are being purchased by American consumers or businesses. The federal government released its calculations this week on net investments in United States long-term securities, and found that foreigners had invested $350.8 billion in Treasury bonds and notes in 2005. They were net sellers of short-term Treasury bills, so their total Treasury holdings grew by just $290.9 billion.... Treasury securities held by the public — that is, by everyone except the Federal Reserve System and other arms of the government — rose by $306.4 billion. That means that 95 percent of the deficit was financed overseas.... The gain last year showed increasing foreign trust in American corporations. While United States government and agency securities got most of the money, the increase largely came from a greater willingness to buy corporate bonds and stocks. Foreigners put a net $391.7 billion into corporate bonds, 27 percent more than they had invested the previous year and the largest amount for any year on record."
Let's hope they don't change their collective minds anytime soon . . .