Brad Setser

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The July TIC data

by Brad Setser
September 19, 2007

A few quick observations on yesterday's TIC data.

  1. Foreigners sure didn't like US long-term debt in July.   The "quality" of the financing of the US deficit fell dramatically.   Almost all the inflows, including almost all the net official inflows, were short-term.  Foreign demand for US corporate debt — a category that includes mortgage-backed securities and CDOs — was way down.  Indeed it was the lowest since 1995.    That is unlikely to have changed in August or September.  Stephen Johnson of Reuters quoting David Powell of IDEA: "

    Net purchases of U.S. corporate bonds hit their lowest level since December 1995 and purchases of agency securities, such as those issued by home loan funding company Fannie Mae (FNM.N: QuoteProfile , Research), also fell sharply. "The real culprit here is the credit crunch, which has caused a drastic slide in purchases of corporate and agency bonds, and I think it's only a taste of what's to come because the real problems didn't hit until August" said David Powell.

  2. The fall in official purchases of long-term US Treasuries in the July data is a bit misleading.  Official actors — basically central banks — bought T-bills rather than long-term bonds.   Long-term Treasury holdings were down by about $7b, but holdings of short-term T-bills were up by $15b.  And I would bet that a decent share of the $16.4b of long-term Treasuries that private actors in the UK bought in July ended up in central bank hands.

  3. Moreover, the fall in long-term holdings was almost certainly driven by Norway's sale of $12-13b of long-term Treasuries, and those sales aren't real "sales."  Norway periodically has a big impact on the data as a result of one of Norges Bank's trading strategies.  Norway's short-term holdings (specifically its "other" short-term holdings) increased by almost as much as its long-term holdings fell. 

  4. China's modest purchases of long-term debt — it only bought $3.8b in July, mostly Agencies and corporate bonds – were offset by a fairly strong — $11.5b — increase in its short-term holdings.  That increase includes a $3.3b increase in its t-bill holdings, which offset the $0.6b fall in its long-term Treasury holdings.  The overall $15.4b increase in China's US holdings though remains small relative to China's likely July reserve growth.

  5. The biggest buyer of Treasuries right now is Brazil.  Its central bank (I would assume) bought $10.9b of long-term Treasuries in July.   Over the last twelve months, Brazil's total holdings of Treasuries are up $73b.  Who would ever have guessed that Brazil would provide two times as much "official" financing to the US in a year as the IMF provided to Brazil back in 2002 and 2003?

The underlying data I used for this analysis all comes from various bits of the Treasury International Capital System's web site.


  • Posted by Dave Chiang

    What Ben Bernanke is saying with his sharp interest rate cuts, is that it continues to hold no other value higher than the pleasure to be attained through its own excess consumption. In depreciating the value of the currency it uses to pay China for its goods, the US is telling China that it has no intention of paying China the full value for what it buys from it; that would be unacceptable, it would mean that there would be less money to buy even more stuff.

    China does not have to continue to put up with this. China could do it smart, “slow and gradual”, that’s the way China likes to manage change. There are some indications that this is exactly what is happening. From a level of over $160 billion a year in 2006, Tuesday’s US Treasury Department’s Treasury International Capital (TIC) report, released a few hours before the Fed meeting and so thus totally ignored, showed that foreign (like the Chinese central bank) buying of US government securities actually turned negative in July.

    China probably is already diversifying away from the US dollar, but among all the cacophonous noise of the glorious roiling tsunami of inanity that is US public life, the actual signal information is being missed.

  • Posted by bsetser

    Actually, China shortened the maturity profile of its Treasury holdings, reducing its long-term holdings while adding to its short-term holdings. I wouldn’t call a $15b rise in recorded $ exposure diversification, especially since i suspect that China also was behind some of the rise in the UK’s holdings of Treasuries.

    But given the gap between recorded inflows to the US ($15b give or take) and China’s likely July reserve growth ($40b, +/- $5b) you can pretty much make any argument you want … personally, i would — in the absence of compelling evidence to contrary — assume that the US continues to undercount Chinese purchases.

    what is clearly happening?

    1) China has at the margins shortened the maturity of its portfolio. this is consistent with macroman’s argument that SAFE was building up liquidity in anticipation of shifting some assets over to the CIC.

    2) china is increasingly buying agencies rather than Treasuries. That continued in July, and is a long-standing trend.

    Way way too much is made of the long-term treasury data in my view– it needs to be examined together with the data on Agencies.

  • Posted by Rachel

    What’s your take on the Asian oil exporters? – net equity purchases of 2b in July and net sales of LT debt and a 6.5b decrease in ST claims

    do you think assets are being shifted to the funds?

  • Posted by bsetser

    No clue. Not enough of the Gulf’s flow shows up in the US data for me to have any real confidence it tells us much of anything. Though certainly a shift to less liquid assets — i.e. more investment by the Gulf SWFs — is one potential explanation for the fall in s-term claims.

    What happened to SAMA deposits in July? If they also fell, that may tell us something …

  • Posted by Guest

    brad, did you see this re the saudis refusing to lower their interest rates and what this might mean for the $?;jsessionid=IDG4XBBD44NWXQFIQMFCFFOAVCBQYIV0?xml=/money/2007/09/19/bcnsaudi119.xml

  • Posted by Guest

    Almighty US dollar turns into ‘American peso’

    There is this joke circulating in financial circles that the once “almighty US dollar,” is fast turning into the “new American peso.” Since 2001 the dollar has lost more than half its value against the euro. It now costs nearly $1.40 to buy one euro. And it isn’t just the euro that seems to be growing stronger against the US dollar. It has declined against many other major world currencies, and even including minor ones like the Phillipine peso, reflecting the dollar’s loss of purchasing power.

    As the Los Angeles Times reported, “in much of the world — from Brazil to Poland to Thailand — one dollar buys less than it did a year ago, and far less than it did four years ago. On Friday, the US currency hit a 30-year low against its Canadian peer.”

    The danger, the LA Times warns, is that the Fed rate cut could spark a much faster downward spiral in the currency. “That could occur if lower interest rates on dollar-denominated bonds caused foreign investors to balk at buying more, or encouraged them to sell US securities and invest their money elsewhere in the world. Worse, wholesale flight of foreign money from US bonds could drive up long-term interest rates if the Treasury and other debtors have to pay more to attract investors to their securities.”

  • Posted by bsetser

    the telegraph story seems a a bit sensationalized —

    among other things, the saudis official assets — at least those on SAMA’s balance sheet, which I presume is what folks mean when they talk of the a future generations funds — are in the $250b range, not $800b. There are some additional foreign assets with the pension funds and the banks, and no doubt there are a lot of “private Saudi foreign assets” but i still don’t quite see how you get $800b in a future generations fund. ADIA may have $800b, which perhaps is the source of the confusion …

    And while i do think the Saudis cannot maintain higher rates than the US for long without being overwhelmed by capital inflows, i would still be surprised if this augers an immediate change in the peg. The Saudis have been the most resistant to any change in the peg, by far and based on the reported data have a smaller inflation problem than the rest of the gulf (tho i have some doubts about the Saudi numbers).

    Indeed, i suspect the constraint on a broader realignment in the Gulf is the Saudi’s reluctance to change.

    This isn’t to say that the Saudi rate story isn’t worth watching. i had sort of assumed that they had lowered rates with the Kuwaitis and the UAE, so i was surprised by the story. And I do think the Gulf’s peg to the dollar is increasingly untenable, as the us and Gulf economic cycles are currently moving in very different ways (as are the $ and oil).

    But I would suspect that the most likely resolution of the contradiction between Saudi rates and the peg is a fall in rates, not a change in the peg. I don’t think there is yet consensus in Saudi to break the peg (but here I truly am trying to read the tea leaves based on extremely limited information).

    But you never know. Economic logic does suggest that the peg isn’t working for the Gulf anymore, which lends a bit of credence to even this kind of story.

  • Posted by black swan

    With lumber prices at 20 year lows, and the Loonie at a 30 year high against the USD, does anyone think the Loonie is still a safe hedge against the USD?

  • Posted by inquiringMind


    CAD benefits from oil & gold exports. I’m sure lumber would be a part of CAD strength/weakness, but I’ve never heard of lumber given any prime position in that kind of discussion – oil & gold are most often mentioned…

    I think CHF is a safe hedge against USD decline. JPY is a bet on USD decline.

    (Some may argue that EUR is better than CHF since it is more broadly based & they may be correct…but I am a traditionalist).

    Other views?

    Re: Saudis

    The Telegraph – especially Ambrose Evans-Pritchard – has been trying extra hard to stir the pot lately. (Not that I don’t think the issues are worth raising…I just think they are selling newspapers here).

  • Posted by Dr. Dan

    Thanks for the data points, Brad. Why have you restrained from offering your “inferences” on this data ?
    Sure, not all of us can draw conclusions by looking at this data.

    When we read something like the below (from UK telegraph) its alarming. What is ur gut feeling on US Bond market and more importantly USD hegemony ? Is it all set for a collapse. ??

    There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.


  • Posted by London Banker

    @ Brad and Guest

    The euro is soaring against the dollar this morning on the Saudi interest rate hold.

    It’s no longer just the Telegraph speculating about them shifting away from the dollar peg.

    “This signals the oil-rich kingdom is preparing to break their dollar peg and with 3.5 trln usd in dollar denominated reserves in the region any stampede out of the US unit would hurt,” said Matthew Foster-Smith at Thomson IFR.

    I’ve been saying since December 2006 that the dollar peg in Saudi and UAE couldn’t hold in the face of massive imported inflation.

    The Fed’s cut could be seen in retrospect as one of the greatest misjudgements of all time if it leads to the rapid de-dollarisation of the Gulf. With 80 percent of exports going to Asia and only 10 percent of imports from the US, selling precious oil for increasingly worthless dollar scrip and tying their economies in knots to do it doesn’t look very attractive. The cut in rates might have been the last straw.

    When Kuwait left the dollar peg earlier this year, it did so without readjusting its reserves dramatically. It just specified a putative basket of currencies for its peg without dumping dollars from its reserves. Saudi could try to do the same, minimising the immediate impact for dollar investments. Unfortunately, the signal that Saudi would send would be a hundred times stronger in the current fragile credit environment than the signal from Kuwait while the market was still robust.

  • Posted by Guest

    bye bye northern rock

  • Posted by bsetser

    I agree that the Saudi and other GCC pegs cannot hold.

    I would still bet though that the Saudis haven’t quite taken the decision to move off the peg — and the most likely outcome right now is that they will end up reducing rates rather than revaluing. that said, the odds of a shift are growing.

    i just wouldn’t rule out the possibility that this just amounts to a policy mistake by the central bank governor, who may think the saudis have more room for an autonomous policy than they really do.

  • Posted by AC

    Does anyone know why China prefers the Agencies instead of Treasuries? Is there any potential problem with the Agencies (can Fannie and Freddy go bankrupt)?

  • Posted by London Banker

    @ Brad

    I tend to agree that the Saudis haven’t taken the decision yet to move off the dollar peg, but may have held their interest rate for dual purposes. Domestically the higher rate helps rein in high inflation. As domestic capital markets are largely closed to foreigners, they can hold off inflows pretty well. At the same time the Saudis may be signalling to Bernanke not to cut again in the near future. Saudi patience and generosity are not infinite when their hard earned oil revenues go to subsidize Wall Street bonuses. Their oil has real negotiable value. They must be unhappy that their dollar assets have much less value as of today.

    It will be interesting to see what happens to credit spreads in the next few days. The central banks have pretty well exhausted their biggest guns. If interbank and commercial paper rates creep higher now – reflecting a distrust of the dollar and the risk profile of counterparties – there is little more the central banks can do.

    Already there is scepticism about the quality of earnings being reported this week. Lehmans level 3 earnings (mark to make believe) rose from 8 percent to 11 percent of earnings, and the CFO refuses to detail the underlying nature of the $700 million loss or how it was measured. I’d be surprised if they benefit from the Fed’s rate cut when they go to the market for cash.

  • Posted by A. P. Simkin

    Dr. S!

    Do you know if China has a rule similar to the Japanese: that official holdings of assets with a maturity of more than five years are not counted in the published reserves? If they do, it would help account for the gap about which you have commented.

  • Posted by RebelEconomist

    Since it is the flow of intervention that holds a currency peg, not the stock, the GCC will not necessarily be sellers of dollar assets if they give up their peg. They will be much reduced buyers though, and I guess in view of the importance of continued inflows to America that Brad describes, that is bad enough.

    The question of whether the agencies can go bankrupt came up in this blog a couple of weeks ago. My view of this has changed a little in the wake of Northern Rock. I still do not believe that the agencies can go bankrupt because of borrower defaults. A firm cannot just be declared bankrupt without an opportunity to realise its assets, and since in the case of the agencies this would involve mass foreclosures, I think that bankruptcy in this way is politically impossible. In the light of Northern Rock however, I suppose that an agency could be shut down because it could not fund itself.

  • Posted by Guest

    ” it is the flow of intervention that holds a currency peg, not the stock ”

    good point

  • Posted by London Banker

    The yen is rallying strongly against the dollar following the Bear Stearns results – Q3 earnings down 62 percent. Looks like some folks are reading the end of the carry trade into reduced profits and higher level 3 (mark to make believe) earnings at the investment banks on top of the insouciance of the Fed.

    This is going to get ugly faster than I thought . . .

    I’m going into the City tonight for a banking gig. Should be interesting.