The U.S. household sector bought $147 billion of Treasury securities in the first quarter, the Federal Reserve said in its quarterly flow of funds report. That pushes Americans’ holdings of Treasury debt to $796 billion, the highest level since 1999.

It also vaults U.S. households past Japan to the No. 2 position among holders of full faith and credit federal government debt, according to the flow of funds data and Treasury’s own figures. (See chart at right.)

Foreigners are still the biggest supporters of U.S. deficit spending. They bought $198 billion worth of Treasurys in the first quarter, soaking up 41% of issuance.

For years pundits have speculated about what might happen should outsiders back away from financing America. Doomsayers have focused in particular on the threat that China will slow its rapidfire accumulation of dollars and its acquisition of U.S. govenment bonds.

We are a half step closer to finding out. China’s central bank said this weekend it would allow the Chinese currency, the renminbi, to trade more freely within a controlled band against foreign currencies including the dollar. Eventually, a floating renminbi could reduce China’s demand for Treasury debt.

But probably too much has been made of China’s role in financing U.S. spending. After all, there has been no shortage of domestic demand for bonds lately, from households and otherwise.

U.S. banks bought $64 billion worth of Treasurys in the first quarter; the Federal Deposit Insurance Corp. said last month that federally insured banking institutions boosted their Treasury holdings by 53% in the first quarter.

Government-sponsored enterprises such as Fannie Mae and Freddie Mac went on an even bigger binge, nearly tripling their holdings of federal debt.

Some wonder how strapped consumers can afford to spend billions on low-returning government bonds. One hard-core critic of U.S. fiscal laxity, Toronto hedge fund manager Eric Sprott, has questioned the massive reported purchases by the household sector. He claims the government is manipulating its data for the sake of running a giant “ponzi scheme.”

But to others, households’ rush to Treasurys makes all too much sense.

At a time of deleveraging, high unemployment, falling wages and weak growth prospects, investors buy bonds because they need income, says Gluskin Sheff economist David Rosenberg. As he often tells readers of his daily market musings, “Bonds have more fun.”

If so, Americans are in for a rollicking good time as they pick up more of the U.S. financing tab.