The U.S. Congress, with bipartisan support, is considering legislation that could reduce the flow of funds into the U.S. bond market, cut financing for the War on Terror and support for the real estate market, increase long-term interest rates, and slow economic growth.

The purpose of this proposed legislation is to eliminate the trade deficit with China.

The U.S. Constitution gives Congress the prerogative to regulate international commerce,

About 25% of the trade deficit relates to the China trade.

(See: “Is The U.S. Trade Deficit Sustainable?“)

Funds originating from the trade deficit are a major source of financing for the U.S. bond market.

(See: “U.S. Bond Demand Has Exceeded Supply for a Decade“)

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Despite the high costs of the War on Terror, heavy consumer borrowing, and a recovery in the economy, new bond issues have been falling since 2003, as the graph shows. The four main segments of the bond market are Treasury securities (Table F209), agency securities (Table 210), municipals (Table F211), and corporate and foreign bonds (Table 212).

	Net Issues of Bonds

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At least since 2003, the issuance of corporate bonds has been falling, while demand has increased, forcing buyers, on balance, to go into the secondary market to fill purchase orders for this type of fixed-income security.

(See Flow of Funds Table F212, Corporate and Foreign Bonds)

The graph shows that net purchases of corporate bonds has been on an uptrend over the last decade, with foreign buyers exerting increasingly pressure on the market.

	Who Buys Corporate Bonds?

Comparing this picture with the graph in the article, “Corporate Bond Issues Hold Steady: Q3 2005“, the disparity between supply and demand is evident.

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