Brad Setser

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The May TIC data (with special attention to Agencies and London)

by Brad Setser
July 16, 2008

The TIC data for May doesn’t lend itself to any overall story line.

Net long-term inflows were OK — with foreign purchases of over $90 billion of US long-term debt offsetting the $25 billion or so in US purchases of foreign stocks and bonds. Foreign demand for US corporate debt reemerged (total official and private purchases topped $55 billion) but a little under half that demand came from the Caymans — which is always a bit suspicious. Recorded official inflows were a bit low — only $16.7b. But that is too be expected now that most official asset growth is in China, Russia and the Gulf. The US data consistently undercounts flows from all three. Chinese purchases of long-term US debt — $35.6b — were particularly strong (they exceeded total official purchases, which raises some interesting questions). However, China financed some of the long-term purchases were financed by running down short-term holdings, which fell by $15.9b. Overall Chinese purchases of around $20b are still low relative to Chinese foreign asset growth.

Moreover, as I’ll explain below, it makes sense to add the UK’s purchases of Treasuries and Agencies ($39.6b) to the “official” total — which would bring official purchases of long-term up above $50 billion — a more realistic level.

However, net TIC inflows were quite bad. After adjusting for amortization payments and the like, the net increase in foreign long-term claims on the US was about $45 billion. That wasn’t enough to offset a $56b fall in short-term claims on US banks. On net, $2.5b flowed out of the US. That cannot last for long. But I still don’t have a clear idea why short-term claims fell so dramatically.

Given all the interest in Agencies, I wanted to update some of the data I presented earlier this week.

Central bank demand for Agencies was fairly robust in May — with $10.8b in recorded purchases of long-term Agencies and another $15.6b in likely purchases through London. But that rise was to a degree offset by a fall in official holdings of short-term agencies (on the assumption that other short-term custodial liabilities are a reasonable proxy for short-term Agencies). Total central bank holdings of long-term Agencies rose to $814.4b. I estimate for central bank holdings of short-term Agencies fell to $112.8b (75% of $150.8b of short-term custodial claims other than short-term Treasuries), bring total estimated official holdings up to $927.3 billion.

But the UK now holds — based on adding recent flows to the UK’s stock — about $140 billion of Agencies. I would bet, based on the pattern of past survey data revisions, that $110b or so of those Agencies are really owned by central banks — which would bring total official holdings over $1 trillion.


China holds $436.45b of long-term Agencies. It is reasonable to think — based on its reported holdings of other short-term custodial liabilities – that it has about $20b in short-term Agencies. And it is also reasonable to think that a decent chunk of the Agencies the US sold to banks in the UK were then sold to the PBoC. On this basis, I am confident that China’s total Agency exposure is currently in the $500b range.

Russia’s holdings of long-term Agencies rose to $90.2b. Most of its $62b in other short-term custodial liabilities are in Agencies — hence I continue to think Russia has around $150b in Agencies. I should note though that Russia has been increasing its holdings of both short and long-term Treasuries recently, so proportionately a smaller share of its reserves are in Agencies than in the past. Russia’s willingness to hold Treasuries is actually a bit of a change — until recently, it almost never held many.

Japan’s holdings of long-term Agencies rose to $255b. That reflects a mix of official and private holdings. Korea’s Agency holdings rose and its Treasury holdings fell, continuing a recent trend. Over the past couple of years, the Bank of Korea has reduced its Treasury holdings and increased its holdings of Agencies and US corporate debt.

The Gulf, by contrast, has been selling long-term Agencies over the last few months. The Gulf’s recorded US holdings (which likely understate its total exposure, as the Gulf makes heavy use of external managers) of Agencies are only a bit over $20 billion.

Please remember that the recent “Agency” crisis will only start to impact the data for July, which won’t be out until September — for a higher frequency read, look at the Fed’s custodial holdings.

Three final points, each of which responds to questions that I have received as a result of my post over the weekend.

First, why are my estimates of Agency holdings for a country like China higher than the “official” estimate from the Survey? Simple. The survey shows Agency holdings from last June. I have brought that data up to date by adding in flows.

Second, why do I believe the US data likely understates Chinese and Russian holdings?

Here, the answer is a bit more complicated. Those of us who spend a lot of time ferreting around in the details of the TIC data have noticed that the UK’s implied holdings of Treasuries and Agencies (estimated by summing up flows) tend to get revised downward in a big way when the US releases the survey data. Private holdings also tend to get revised down. Official holdings, Chinese holdings and Russian holdings all tend to get revised up.

Consider the following charts.

The UK’s holdings of long-term Treasuries and Agencies over time:


The UK’s holdings of long-term Treasuries relative to the holdings of China, Russia and the Gulf over time.*


The UK’s holdings of long-term Agencies relative to the holdings of China, Russia and the Gulf over time.*


Notice a pattern?

Incidentally, China tends to account for a larger share of the “UK” adjustment than the Gulf. That is why it is inaccurate to use flows through London as a proxy for oil flows.

There, of course, is a lot of Gulf money managed in London, and in other European financial centers. But that money doesn’t seem to be invested heavily in Agencies or Treasuries. The survey revisions don’t tend to dramatically increase the Gulf’s holdings. And if private fund managers were managing large portfolios for the Gulf, one would expect the UK’s own holdings to rise over time — and they are not. Here though I should note that some of the Gulf’s holdings may be showing up in the rise in the holdings of other European financial centers over time. This is something that I need to investigate further.

Third, could the Treasury market absorb a big shift in central bank demand away from Agencies?

That actually is an interesting question, and not one that I can easily answer. China now has $491b of long-term Treasuries (and another $16b of bills), and central banks have $1525b of long-term Treasuries (and another $219 of bills). The outstanding stock of marketable Treasuries in May was $4665 billion. So central banks account for 37% (37.4%) of the total stock, and China accounts for around 10% (10.8%) of the total stock.

However, the survey data (see table 12b of the survey) suggests that central banks hold relatively few bills — and only a small number of “long” bonds. Bonds with maturities of over 10 years account for only 4% of total official holdings. They also haven’t been big buyers (to my knowledge) of inflation linked securities. Most of their holdings are coupon paying notes — i.e. Treasuries with a maturity of 10 years or less. And there were only $2475 billion of “notes” outstanding at the end of May. If all of China’s long-term holdings are “notes,” China holds about 20% of the stock of notes (19.8%) and central banks hold about 60% of the stock of notes (61.6%). That is an overstates things a bit as central banks do have some longer-term bonds and linkers, but it nonetheless suggests that central banks hold an awful lot of the outstanding stock of coupon-paying notes.

The Treasury will be issuing more, of course. And the Fed has been reducing its holdings of Treasuries (bills in particular), further increasing the stock in the market. But if China and Russia redirected all of their purchases toward the Treasury market, Treasuries might become a bit scarce.

* Special thanks to Arpana Pandey for help analyzing the TIC data and preparing these graphs.


  • Posted by bsetser

    I had a few technical difficulties posting this; if it disappeared for a while, that is the explanation.

  • Posted by Jeff Benson

    So these Chinese have really fueled the American Housing Boom. I guess they thought it was a good investment (financing you’re largest customer). Now the US Government is going to “make good” on Chinese loans. That doesn’t sound like a maneuver typical of our president. It doesn’t seem like the US Government could possibly afford such a bail out. I think this is going to shred the dollar, as Chinese lenders start pulling capital and looking elsewhere. Not to mention, take care of all the Fed’s inflation concerns.

  • Posted by Rien Huizer

    Brad, continues to a a fascinating topic. The Japanese number is lower than I would expect. Perhaps some of those portfolios are managed onshore.

    Reading a bit on the GSE thing on RGE monitor (everyone should also read Roubini’s ten recommendations (despite the presumptuous title, not bad)) it occurred that any solution with sacrifices (interest cuts, principal haircuts, rscheduling, whatever) involving foreigners (as well as locals of course) would not only be difficult to execute and possibly conflict with the ongoing business of mortgage lending (someone has to do it) and the gigantic negatve externalities of leaving the liquidity part of the problem (solvency is a different matter) unsolved, vs the various communautarian costs of solution. As said, it would not only be difficult to design and execute. But also, virtually all of the restructuring proposals (again other than a straight bailout taxpayers account) would cause the GSEs to technically default on their large swap/option portfolios (so far probably uncollaterailzed) which would invite counterparties who would have a positive NPV to demand termination. On about 300 bn of long term swaps
    the cherry-pickers could easily wipe out the bail out risk capital addition. And there is no way to haircut interest rate derivatives short of bankruptcy..
    So is is entirely unlikely that any of our responsible suggestions will ever make it to policy making. Just a creeping nationalization of the GSEs. And that would pay this unholy alliance of ex-communists, hedge funds and irrational life insurers a little too well for their superior ability to play chicken with a democracy. See Gil Merom’s “How democracies lose small wars” Perhaps during the coming weekend, US government officials and politicians should reflect upon Roubini’s Commandments. And be prepared to atone for past sins.

  • Posted by Rien Huizer

    Re the Japanese portfolios: onshore to mean in the US

  • Posted by Judy Yeo


    Not too sure if it answers some of your doubts but the FT has an article on the reduction in dollar denominated investments by the SWFs. Could that explain some of the data mysteries?


    So, the solution to being a poor individual is to start dodgy businesses , get as many financial institutions involved as possible, preferably sell out to one of them, then sit back and watch the drama called swamp things.

    Give the insurers a break.They were heralded as one of the few bright spots earlier in the year when the mortality bond business boomed whilst all else froze.Perhaps you might need them to “bail you out”” should you fail to come up with the inheritance for your kids, hehheh, never too early to start planning!

  • Posted by bsetser

    Judy — not really. the FT article suggests that a fund still has 60% of its exposure in $, which is a lot higher than my working assumption. The claim that a fund was 80% $ until recently also is a surprise. I previously had thought must Gulf SWFs (as opposed to CBanks) were 40-50% dollars.

    Rien — or perhaps the Carribbean/ another offshore financial center. After 2004, recorded Japanese purchases of US assets have basically dried up, which is something of a mystery.

  • Posted by Rien Huizer

    Judy, that was comment to an earlier post. I am not quite sure what you mean. All I tried to do was to highlight the difficulty of designing an efficient (???) scheme for deposit insurance. And without deposit insurance, and also the intention to not bail out uninsured creditors of a “financial institution (whatever that may be)” there is a bit of a problem if you are facing systemic breakdown, with the people who were playing chicken with your courage of not bailing out etc at taxpayers expense standing around with big smiles..If you are a politician, you swallow your pride. If you are a hero, the other people will lynch you. As the good people in the Istana will agree, good government is difficult, unless you prepare yourself for the job and do not spoil your people too much.

  • Posted by Rien Huizer


    That would be one possibility. I do not think we are talking about trillions of USD, but say usd 250 bn in the private sector would be more in the direction. And could do a healthy bit of harm. It is either trust accounts in the US or a suitabl offshore center. But everything is anecdotal of course.

  • Posted by Rien Huizer

    Brad, again a mistake. I was of course referring to private sector holdings (which would unfortunately include some parts of Zaito) of non treasury US MBS. Could be non agency as well, but that would be pretty unsophisticated. That stuff would be sold by the securities companies (packaged) to private investors.

  • Posted by Rien Huizer

    Just to add, for everyone who does not read the Washington Post