Some good news today as the TED spread dropped significantly. But, this is not good news.

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At first glance, the declining Chinese appetite for U.S. debt – apparent in a series of hints from Chinese policy makers over the past two weeks, with official statistics due for release in the next few days – comes at an inopportune time. On Tuesday, the U.S. president-elect, Barack Obama, said Americans should get used to the prospect of “trillion-dollar deficits for years to come” as he seeks to finance an $800 billion economic stimulus package.

Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasury securities. In the past five years, China has spent as much as one-seventh of its entire economic output on the purchase of foreign debt – largely U.S. Treasury bonds and American mortgage-backed securities.

But now, Beijing is seeking to pay for its own $600 billion economic stimulus – just as tax revenue falls sharply as the Chinese economy slows.

Link: U.S. debt is losing its appeal in China – International Herald Tribune