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A bit more to worry about; foreign demand for long-term Treasuries has faded

by Brad Setser
March 18, 2009

I wanted to highlight one trend that I glossed over on Monday, namely that foreign demand for long-term Treasuries has disappeared over the last few months. Consider a chart showing foreign purchases of long-term Treasuries over the past 3 months. Incidentally, the split between private and official purchases in this data should largely be ignored. The revised (i.e. post-survey) data generally have attributed nearly all the flow from 2003 to the official sector.

The rolling 3m sum bounces around a bit, but foreign demand for long-term Treasuries in November, December and January was as subdued as it has been for a long-time. Among other things, that fall in foreign demand for long-term Treasuries after October suggests — at least to me — that the big Treasury rally late last year (and subsequent sell-off this year) doesn’t seem to have been driven by external flows. Foreigners weren’t big buyers of long-term Treasuries back when ten year Treasury yields fell to around 2%.

There also is at least a passing resemblance between a chart of foreign demand for US corporate bonds and foreign demand for Treasuries.

It is also striking that — for all the talk of safe haven flows to the US — foreign demand for all long-term US bonds has effectively disappeared.

What have foreign investors been buying? Short-term Treasury bills. In huge quantities. On a rolling 3m basis, foreign investors bought nearly $500 billion in bills at the peak of the crisis.

However, that surge in demand for bills now seems to be fading.

The fall off in total TIC flows in January reflected private bill sales. The official sector is still buying — $100 billion in bill purchases over the last 3 months of data only seems small relative to the post Lehman peak. But with global reserve growth slowing (even China doesn’t currently seem to be adding to its reserves), central banks won’t be as large a source of demand for Treasuries going forward as they have been in the past.

That means a fall off in central bank demand for Treasuries wouldn’t necessarily be a sign that central banks have lost confidence in the US Treasury market. It could equally be a sign that a lot of central banks no longer have any new funds to invest.

That said, a lot of central banks are now holding an awful lot of zero coupon (or close to it) bills. At some point they might be induced to buy somewhat longer-dated Treasuries to pick up a bit of yield. No trend — including the current vogue for bills — lasts forever.

Why does this matter?

Foreign demand for Treasuries hasn’t kept up with Treasury issuance, but it undeniably has been strong. Over the last 12 months, net foreign purchases of Treasuries financed much of the US current account deficit.

The trade and current account deficit has fallen substantially as a result of the fall in oil prices, so the US needs less external financing now than in the past. But it still needs some.

The “quality” of the financial flows into the US consequently bears watching. A modest revival in foreign demand for longer-dated US assets would be a positive sign. To date, the sale of US assets abroad and a scramble for liquid dollar assets has provided the US with more than enough financing to sustain its deficit. Those flows though may not continue.

And if — as seems likely — foreign demand for Treasuries fades long before the US fiscal deficit, the US Treasury will need to sell an awful lot of Treasuries to American investors. For the past several years I have argued that it was almost impossible to overstate the impact of central bank demand on the Treasury market.

That may no longer be the case going forward.

The world is changing. Global reserves aren’t growing. The echo from their past peak that we observe in the current Treasury data will fade.


  • Posted by K T Cat


    Amen, brother! There are no limits at all. The Fed, in one day, agreed to buy almost as much as China bought all last year. They picked the number $300, but what difference would it have made had they said 400, 500, 600 … ?

    Without the need to worry about whether or not you can borrow the money you want to spend, why stop spending?

  • Posted by Cedric Regula

    curious: on mark to market

    I heard they did modify the rules already last november. Didn’t help enough.

    But a real reason for doing it would be fear of interest rate increases. That would push down mortgage paper further.

    So now we see that Ben will buy another 1.2T in debt ranging from treasuries to GSEs to car loans to old vacations paid on a credit card. All in the name of keeping interest rates down. But all these programs are buying old debt, and there is no guanantee that the proceeds are used for new borrowing. So to me that sounds like another stealth bank bailout. But if it walks like a duck…

  • Posted by Curious

    @ Cedric

    on mark to market. a shared consensus by myself and the author.

    “without the credit default swap market, there’s no way banks can report the true state of their assets – they’d all be in default of Basel II. That’s why the government will push through a measure that requires the suspension of mark-to-market accounting. Essentially, banks will be allowed to pretend they have far higher-quality loans than they actually do. AIG CANT COVER FOR THEM ANYMORE”.

  • Posted by Cedric Regula


    Ditto, CDS pretties everything up.

    The annoying thing is the USG is absorbing all the toxic stuff piecemeal, one at a time, in the reverse order of what the taxpayer would like, and in the end there will still be bad mortgages on the banks’ books, and they are securitized which means they are interest rate sensitive.

    This was a far worse idea than, say, burning our food supply to make ethanol, or even bringing democracy to the Middle East.

  • Posted by Curious

    still reading through notes from the UN economic team on hard dollar landing that should throw the world into a a possible depression for 2nd half of 09′. Very interesting, pretty much in line with a European anticipation group that has been spot on before guys like Roubini, etc.

    I’m not going to give financial advice. Guys like Brad @ the Council have stronger relationships that pass in and out of 68th n park.

  • Posted by yoda

    FED just minted $1.15Trillion dollar. how much did China and Japan lost from debasing dollar?

  • Posted by Cedric Regula


    Depends a lot on which movie is playing. The Japanese lost 2% in dollar currency value today, but bonds jumped up more than that. China loses nothing in currency as long as they stay pegged to the dollar, and don’t “spend” too much on the peg now that it got cheaper to do based on the drop in exports. This aso means they print less RMB for the local economy.

    Longer term, the US taxpayer owes it all anyway because the Fed is lending to the Treasury and someday the Treasury will re-cap the Fed to cover other bad collateral, so what’s to lose? Japan and China will just monetize any losses themselves in the name of keeping trade competitive.

  • Posted by Curious

    @ Cedric

    any thoughts we’ll see Geithner resignation before end of March?

    you always know something is IMPORTANT maybe in the cards,we’ve not heard from Brad all day…:)

  • Posted by Cedric Regula


    Maybe brad is interviewing for TG’s job?

    I’ve been thinking someone should arrest Bernanke for being a klepto, so I didn’t realize TG was in the hotseat.

  • Posted by don

    Nice, informative post, but this part: “so the US needs less external financing now than in the past. But it still needs some.”
    There you go again. The U.S. does not “need” foreign capital inflows, and their decline will contribute to a substantial fiscal stimulus through the effect on current account. You appear to be worried about ‘crowding out’ of private investment, but to my mind this is as mistaken as the notion that we need to borrow from abroad to fund stimulus. That would completely negate the effect of the stimulus on the U.S. economy and merely leave U.S. taxpayers burdened with the cost.

  • Posted by Michael

    Bernanke has a model he is following, and he made it public before he became Fed Chair: we shall repeat Japan’s experience with quantitative easing. The rest of us may think Ben is either crazy or stupid to want to reproduce Japan’s experience, but he honestly believes (and stated publically) that the only reason ZIRP and QE did never solved Japan’s problems was that it was implemented “too little and too late.” In a similar way, Greenspan had a model that he followed and which he made public before he became Fed Chair: he bragged that he’d love to see a deflationary crisis, because we now know we can lick it in the twinkle of an eye simply by dropping interest rates; he (and many others) believed that the only reason that the dropping of interest rates early in the Great Depression didn’t work was because it was implemented “too little and too late.”

    One thing should be crystal clear: There is no predictable limit to the amount of money printing and borrowing that the U.S. government is eagerly ready to engage in to try to prove our government can beat market forces at their own game and restore the status quo ante.

    Any currency value loss of the dollar is considered positive in their eyes because it boosts exports, and any resultant inflation is also good in the short term (it counters the dreaded deflation) and it’s “easily” stopped at will by “simply raising interest rates.”

    If the foreigners don’t want to buy our trillions of Treasuries, no problem, we’ll just buy them ourselves.

  • Posted by 90210

    The Federal Reserve (a privately owned corporation) which is as federal as Federal Express, and has zero reserves, because it creates money out of thin air and loans out to governments with interest to finance wars and bailout economies is stuck with the paper. It can’t get anyone to invest in long term notes, so it is buying them back, giving the illusion that the Fed is acting responsibly. Simultaneously, it is keeping interest rates at near zero rates which only exacerbates the problem. When long term corporate debt stops being issued, long term plans come to a halt.

  • Posted by WStroupe


    You document very well the asinine and gross arrogance of U.S. economic/financial leaders, starting especially with Greenspan, and the utterly shortsighted policies they conceive and enact as a result. They evidently see themselves virtually as gods. In several months’ time we’ll be talking right here in this blog about how the Fed’s efforts to mop up all the excess liquidity will be grossly failing, and how hyperinflation took root and absolutely ravaged the dollar.

    The formerly god-like Greenspan has, at length, been totally discredited, has he not? Yes. Well, Bernanke’s comeupance is not that far off.

  • Posted by HZ

    Maybe you could address the significance of buying long dated Treasuries in another blog post. Uncle Sam is doing what commercial banks have failed for a while: selling short term liabilities to buy long term assets. So what is the harm?
    Foreigners have to buy something with their dollars. If not long dated treasuries then bills. If not treasuries then corporate debts or mortgages: which is Fed would like to drive them to any way.
    Finance is a zero sum game, so the judge will be the real economy. Will our economy become more rational? A falling dollar does not seem to hurt. Fed would not want people to be too complacent about holding cash.

  • Posted by hagelstein

    please help me understand: The government borrows USD$, and then turns around and sells bonds? Is this the leverage which got us into this fking shtole in the first place?

  • Posted by hagelstein


  • Posted by david_in_ct


    Yes you are missing something. Chairman Bernanke has just told you (like he has been telling everyone all along) that in the end there will be no deflation. He is demonstrating for all to see that he can create as many fiat dollars as he chooses just by typing a few numbers into a computer (Note that this is very modern and green since no trees or ink need be sacrificed).
    So for everyone worrying whether or not China or anyone else is going to fund the trade deficit or the budget deficit the answer Ben is proposing is ‘not to worry’. We can print just as much as we like. So to all you guys who have gone down the mercantile path of printing lots of your own currency to keep your exchange rate low to keep your industries running in a beggar thy neighbor sort of way we salute you and tell you all your dollar reserves ain’t going to be worth one hell of a lot after all. Thanks for all the toys.
    Not to talk my book too much but Copper is going to be very sought after in terms of the US buck.

  • Posted by locococo

    Additionally, they could increase the number that they (for govies and pimco) at will.

    Additionally, one can additionally broaden the wide range of target liabilities to acquire with those newly $s (additional privately issued bonds, swaps, equity, bonuses, political party contibuts, why not oil / off shore accounts, chinese imports, housing units, fdic account, gold etf s, pm and treasuries iou s, 401k s etc).

    There are many tools in that kit.

  • Posted by K T Cat

    This move is not wrong because of the printing of money, it’s wrong because of what that money will buy. If we had rational, thrifty people in charge of the government purse, this would be a wonderful move. Instead we have Obama and Pelosi. Bernanke’s money goes straight to them. We are devaluing the dollar and handing the proceeds squeezed from all of us over to a pack of business incompetents.

  • Posted by Curious

    this post was one brad’s best to date.

    before the Fed policy meeting, the headline

    “bit more to worry about; foreign demand for long-term Treasuries has faded”

    signal Bernanke has no choice but crank up a massive Multi-trillion dollar printing experiment.

  • Posted by Cedric Regula

    Looks like Ben is saving us from oil deflation. That will be one feather in his cap!

  • Posted by jonathan

    A note to K T Cat: that’s not what the Fed does. Learn about it. They do the work, the buying, the selling, the printing and the “actual” government has next to nothing to do with it. This is not money for Congress to spend.

  • Posted by Ying


    Realistically, it doesn’t make sense for Chinese to buy long term treasury bond. On top of exchange rate loss ( if there will be 10 to 20 percent appreciation of yuan against dollar), there will be long term interest rate hike (long term expected high inflation). The double loss could easily devalue the long term treasury bond maybe up to 50%. Correct me if I am wrong.Devaluation road is going to be bumpy.

  • Posted by gillies

    so bernanke is just a card sharp who doesn’t even bother to hide that although he lost most rounds so far, he has a reserve pack in his back pocket and a machine at home that prints packs of cards and he can play five aces at once if he likes.

    what can the other players do except quietly get up from the table ?

  • Posted by K T Cat

    jonathan, who gets the money when you buy Treasuries?

  • Posted by gamma

    $3 trillion + in credit destruction in 2009
    $2 trillion in Fed printing / gov’t stimulus

    Net result is credit contraction. Deflation will win. As always they are behind the curve. By the time they ante up to $4 trillion it will be because bankruptices soared higher than anyone expected and credit contraction will be $5 trillion.

    Let’s not forget that the Fed makes money off of deflation as well as inflation. They created this mess for their own purposes. Roubini, Setser, Soros, Paulson (both of them), me, you – we all saw it coming 2 years ago. This orchestrated to transfer wealth.

    Wealth transfer in progress.

  • Posted by mjB

    Hyperinflation and the crash of the Keynesian model could be in the offing soon if the Chinese drastically draw down.


  • Posted by Wakefield skips

    yes we are in a lot of trouble

  • Posted by C. Michael Reilly

    re; previous comments, blog issue addressed by recent Roubini book “Crisis Economics” ;

    March 18, 2009 at 3:09 pm
    C. Michael Reilly responds:
    With foreigners buying fewer govies , sounds like Bernanke is looking to influence all the ‘safe haven’ , risk averse lemmings into long govies so the smart $ can invest it and raise inflation expectations beyond borderline pathologically low levels here. Timely post Brad. Thanks.

    March 18, 2009 at 3:40 pm
    C. Michael Reilly responds:
    continuation from previous post of 3:12pm mar 18 : ; oops I guess Uncle Sam IS the aforementioned ‘safe haven’ , risk averse lemming … in that case what is the cost to tax payers … or government credibility ? Why is Bernanke so concerned as to do this? Is this smart or … not?

    Current post; Roubini’s book “Crisis Economics” wraps up this issue nicely !

  • Posted by Mortgage Quote London

    Foreign interest will pick up again, but the US may find that it will be from investors they hadn’t previously regarded as worthwhile. Economic power is generally headed east.