Will Asians Dump Their Treasuries? Not Too Likely

By Adam Zagorin/Washington

As Korea, Japan and other Asian economies have plunged deeper into crisis in recent months, fears have spread of the doomsday scenario: Would the Asians begin to sell tens, perhaps hundreds, of billions of dollars in U.S. government securities to pay off their mounting debts? A tidal wave of selling would knock down the price of Treasuries, driving up interest rates and edging the American economy toward recession. In the ensuing panic, stock prices could be hammered, prompting a market crash.

However nightmarish and improbable, this Wall Street bugaboo has been popping up with increasing frequency as the Asian crisis drags on. It's not difficult to see why: Japanese Prime Minister Hashimoto and officials of his Liberal Democratic Party have publicly broached the sale of T-bills, suggesting the proceeds could be deposited in hard-pressed Japanese banks.

Overall, though, the likelihood of a full-scale meltdown is, if anything, less likely because of Asia's troubles. Japan may hold more than $315 billion in U.S. Treasuries, or more than 9% of the total, but the notes give Tokyo some of the highest returns in its otherwise sagging portfolio. The roughly 5.64% yield on a 10-year Treasury bond is more than 3 percentage points higher than the payout on equivalent Japanese securities. Besides, any move out of U.S. bonds would drive down the value of U.S. currency, pushing up the yen. And a strong yen would make exports from Japan more expensive at a time when it must sell goods abroad to stay afloat. "Some people just refuse to understand that massive Asian selling of American securities makes no sense because it is not in Asia's interest," says Michelle Laughlin, a well-known Prudential Securities analyst.

As the world waits for the region to stabilize, global investors continue their search for a safe place to park assets. A favorite haven: American Treasury securities. So popular are long-term U.S. issues that although their yields have dropped nearly a full percentage point over the past 12 months, they still attract plenty of buyers. Now that's popularity.

--By Adam Zagorin/Washington