On Sept. 9, as it must frequently do, the U.S. government turned to Wall Street to raise a little cash, and Paul Calvetti bet that demand for $9 billion worth of long-term Treasury bonds would be "huge."
But at 1 p.m., as the auction opened and the numbers began streaming across his flat-panel screens, the head of Treasury trading at Barclays Capital Inc. slumped in his chair. Foreign investors, who had been voraciously buying Treasury bonds, failed to show up. Bond prices cascaded downward, interest rates rose, and in five minutes, Calvetti, 38, who makes money by bidding on bonds at one price and hoping market demand lets him quickly resell them at a profit, had lost $1.5 million.
"It's amazing," he gasped, after the Treasury Department announced that Wall Street traders, not foreigners, had been left to buy virtually the entire auction. "I don't think I've ever seen this before."
The most recent auction of 10-year Treasury notes may have been a fluke, a momentary downturn in one aspect of the massive world market for U.S. government and private-sector bonds, stocks and other securities -- a market so large and diverse that it has long been the world's safe haven. But a rash of new data, including Treasury Department figures released yesterday showing a net sell-off by foreigners of U.S. bonds in August, has stoked debate over whether overseas investors -- private individuals, institutions and government central banks -- are growing dangerously bearish on the U.S. economy.
It is a portentous issue. Foreign governments and individuals hold about half of the $3.7 trillion in outstanding U.S. Treasury bonds, for example, and the government has been heavily dependent on continued overseas bond purchases to finance the roughly $1 billion a day it has to borrow to pay its bills. Foreign lending and investment are also needed to finance the country's roughly $50 billion monthly trade deficit, while foreign capital has been a key prop to U.S. stock prices.
A turn in overseas attitudes toward the United States could ripple deeply through the economy, depressing the market, raising interest rates and pushing down the value of the dollar.
In August, foreign private investors actually sold $4.4 billion more in Treasury bonds and notes than they bought that month, the Treasury Department said yesterday -- the first time in a year that net foreign purchases were negative. That followed a 20 percent decline in July that shrunk net foreign purchases to $18.3 billion.
Bond purchases by foreign central banks also dropped sharply in July, falling 76 percent, to $4.1 billion. A rebound in August brought them back to $19.1 billion. The recovery was timely: Without it, the dollar may have taken a serious hit, said Ashraf Laidi, chief currency analyst at MG Financial Group in New York, who headlined yesterday's client newsletter, "Foreign Central Banks Save Dollar From Disaster."
Foreign purchases of stocks are off as well, going from net purchases of $9.7 billion in July to a net sell-off of $2.1 billion in August. Over the past 12 months, private foreign investors have purchased a net of $17 billion in U.S. stocks, compared with $30 billion in the 12 months before that.
Measuring the combined purchase of stocks, corporate bonds and government debt, overall capital flows into the United States fell in August for the sixth straight month.
Treasury officials said such data should not be overanalyzed. Net purchases of U.S. government securities may have been low in August, at $14 billion, for example. But foreigners still bought more than $807 billion in Treasury bonds, while selling $793 billion, in a month that is usually a slow one in financial markets, said Treasury spokesman Tony Fratto.
"These movements are taking place in a huge market," he said.
But the downward trend in capital coming to the United States is nevertheless worrying, some economists argue, with particular implications for U.S. government debt.
Foreign central banks and individuals rushed to finance U.S. government budget deficits over the past three years, buying $19.2 billion in Treasury bonds in 2001, $118 billion in 2002, and $279 billion in 2003. Lending from foreign governments in particular exploded last year -- to $109 billion, up from $7.1 billion in 2002.
The fear among economists is that those foreign lenders may grow concerned that their portfolios are too swollen with dollar-denominated assets.
The Chinese -- whose Treasury holdings have tripled since 2000, to $172 billion -- have already begun buying more euro-denominated assets, said Rebecca Patterson, a senior currency strategist at J.P. Morgan Chase & Co.
Earlier this year, both China and India diverted tens of billions of their dollar holdings to domestic projects, with China pumping $45 billion into its banks and India devoting $15 billion to infrastructure projects.
"China and India are no longer committed to open-ended dollar buying," Stephen S. Roach, chief economist at Morgan Stanley, warned clients yesterday. "At the margin this shift is negative for the dollar and for U.S. real interest rates."
As the big players begin to invest dollars domestically, the U.S. government is becoming more dependent on smaller nations, like Singapore and Korea, which may be quicker to sell off Treasurys and could demand higher interest rates, said Sung Won Sohn, chief economic officer at Wells Fargo Bank.
"The U.S. government will always be able to raise money -- well, at least in the foreseeable future," he said. "The question is, what will you have to pay and who will you get it from?"
The U.S. dependence on foreign capital concerns economists on both ends of the political spectrum. In a speech this March, Lawrence H. Summers, a Treasury secretary in the Clinton administration and now the president of Harvard University, warned of "a kind of global balance of financial terror," in which the economic well-being of the United States depends on the actions of foreign governments.
"There is surely something off about the world's greatest power being the world's greatest debtor," he said. "In order to finance prevailing levels of consumption and investment, must the United States be as dependent as it is on the discretionary acts of what are inevitably political entities in other countries?"
Desmond Lachman, an international economist at the American Enterprise Institute, writing for the conservative Web site Tech Central Station, cautioned that foreign central banks "now have considerable ability to disrupt U.S. financial markets by simply deciding to refrain from buying further U.S. government paper."
Patterson said that is not likely, comparing the situation to "a Texas standoff with two cowboys. . . . If Asia stops buying, the market will get wind of it very quickly, and they will rush out the door. And Asia will be hurt very badly."
To John Williamson, a senior fellow at the Institute for International Economics, that is cold comfort. The Chinese and Japanese central banks may maintain their huge reserves for defensive reasons, he said, but a smaller player, like Brazil or Singapore, could try to unload its dollar reserves, triggering a global sell-off. Like a mouse in a circus, even a bit player could cause the elephants to stampede.
"It's absolutely true that it wouldn't be in the interest of the world to do it, but any one country might think, 'I'll beat the crowd and diversify first,' " he warned. "I think that's the more likely scenario."