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Three quick points on the April TIC data

by Brad Setser
June 15, 2009

One. This was a very weak report. Very modest demand for US financial assets from the rest of the world is creating ongoing pressure for the US to adjust — that is for the US trade deficit to fall. Net TIC flows — counting short-term flows — were negative. And unlike in January and February, the negative flow wasn’t coming from large bank flows stemming from the repayment of the Fed’s swap lines (i.e. change in banks’ own dollar denominated liabilities per line 29). Private US purchases of foreign equities ($9.2 billion) exceed purchases of US equities by private investors abroad ($3.7 billion). Americans also bought $13.8 billion of foreign bonds, while — if purchases of Treasuries are set aside — private investors abroad were selling US bonds. That isn’t a good combination for a country with an ongoing trade deficit: Americans wanted to invest abroad more than the rest of the world wanted to invest in the US.

Two. Official investors are shifting out the yield curve — i.e. buying short-term notes rather than just buying short-term bills. The TIC data release shows that central banks bought $17.1 billion of longer-term Treasury notes while reducing their bill holdings by $12.1 billion. That implies a (modest) net $5 billion increase in central bank holdings of Treasuries.
But we also know that this is too low a figure. Central banks holdings of Treasuries at the New York Fed rose by $31.8 billion in April. And a familiar pattern reasserted itself in the data: large purchases of Treasury notes ($22.4 billion) by investors in the UK. A lot of those notes — based on past patterns – were then sold to central banks and then shifted over to the New York Fed. I would then estimate — based on the TIC data — that the real rise in official holdings of Treasuries is close to $27 billion, which fits the custodial data.

Three. The apparent fall in China’s holdings of Treasuries is sure to attract a lot of attention. China’s bill holdings fell by $14.79 billion, while its long-term Treasury purchases were only $10.33 billion. That seems to imply a $4 billion plus fall in China’s Treasury holdings. Looking at the ensemble of China’s US portfolio doesn’t change the picture. Total short-term holdings fell by $22.2 billion, more than offsetting China $7.6 billion in purchases of all US long-term assets (China sold Agencies and corp bonds).

I don’t buy it. This is a case where it helps to know the pattern of past revisions — especially the pattern of past revisions when oil prices have been low. In such periods, China tends to account for a very large share of purchases through the UK. In other words, some of the $22.4 billion of Treasury bonds initially sold to UK banks were then sold to China’s central bank. From mid-2006 to mid-2007, about 2/3s of the UK’s purchases of Treasuries were ultimately reassigned to China. I would expect the something similar is happening now — all of China’s bill holdings tend to appear in the US data in real time, but only a fraction of China’s long-term purchases tend to show up directly in the US data.

After adjusting for China’s purchases through the UK, I would guess that China’s total Treasury portfolio inched up in April. Consider the following graph, which shows the UK’s long-term holdings, China’s recorded Treasury holdings, and the Setser/ Pandey estimate for China’s true Treasury holdings.

china-tic-may

But the rise in China’s Treasury holdings — even after the adjustments — was modest. And China isn’t buying Agencies or US corporate bonds. China’s overall US portfolio isn’t rising at anywhere like the pace it did in 2006, 2007 or even 2008.

And ultimately that is a healthy adjustment. The more unwanted dollars China ends up holding, the bigger the ultimate risk of a disruptive shift out of the dollar.

36 Comments

  • Posted by imapopulistnow

    Brad,

    How do you suppose China can maintain a weak currency if they are in fact cutting back on total USA debt purchases? Is it possible for them to manage their currency through commodity purchases with third-party countries, transacted in dollars, rather than through direct or indirect purchases of Treasuries and corporates? The mechanics of currency valuations have always baffled me.

  • Posted by Indian Investor

    Dr. Setser, according to the TIC data, China bought $7.6 b of long term US securities, while selling $22.2 b worth of short term securities, both figures on a net basis. The total purchases of LT Treasuries from the UK was $22.4 billion.If you attribute around 2/3rd of that to China, you get an addition of of $ 14.8 b. Totaling $14.8 b and $7.6 b, and subtracting the $22.2 b worth of short term net reduction, I hardly get any increase in China’s holdings. How much of the $22.4 b of UK Treasury purchases are you attributing to China?

  • Posted by Indian Investor

    Let’s assume that every month, China buys or sells LT US Secs on its own account, and 2/3 rd of the transactions through the UK in LT Treasury Bonds, net belong to China. In March 2009, China bought $14.98 b worth of long term Treasuries on its own account, while selling around $4276 b through the UK.In February, China sold $2 b worth of long term Treasuries on its own account, and sold another $818 b through the UK. Overall, by your method, China sold $2.818 b of LT US Secs in February, then bought $10.74 b worth in March 2009, and increased that purchase to $22.4 b in April 2009. Meanwhile, Zhou Xiaochuan was writing essays calling for a new international monetary system consisting of SDRs, and Wen Jiabao was expressing worries about the safety of China’s investments in the US.
    Despite China’s sales of US Treasuries in February, that comes from our consideration of the TIC data, the Fed’s custodial holdings of Treasuries rose quite a lot in February. In the last week of Feb 2009, Foreign central banks deposited $4.5 b more of Treasuries in the Fed’s custody, and in the one before that central banks the increase was, I think, around $14.5 b.Can this be explained as increases in short term Treasuries’s holdings by foreign central banks at the Fed?

  • Posted by Cedric Regula

    imapopulistnow: “Is it possible for them to manage their currency through commodity purchases with third-party countries, transacted in dollars, rather than through direct or indirect purchases of Treasuries and corporates?”

    I think this actually would help the dollar, and US trade deficit. The problem we have now is china has more dollars than its appetite for US goods&services. But if it uses dollars to buy commodities from commodity producing countries, these places do still have some demand for US products. So ultimately the US gets some real economy benefit from all the dollars sloshing around out there besides just getting them re-cycled back into treasuries.

  • Posted by K T Cat

    Brad, that was a fantastic bit of sleuthing. Sherlock Holmes has nothing on you!

  • Posted by bsetser

    indian investor — i would attribute roughly 2/3s of the flow thru london to china. but that is an informed guess. you are right though that all in there isn’t any growth in china’s dollar holdings in april.

  • Posted by WStroupe

    Brad,

    Remember in Feb/March when SAFE officials warned that they would require guarantees from the U.S. before they would continue to deepen their position on Treasuries? Looks to me like they’re refusing to buy net more Treasuries until they get the guarantees. I’m dubious about your position that the UK purchases should also end up to be attributed to China’s CB. Maybe much of the UK purchases are private Chinese investors instead?

    What guarantees could the U.S. Treasury offer China that would ok it to deepen its exposure? Panda bonds. Let the Treasury begin borrowing in yuan. I think China’s CB is holding up net Treasury purchases until Obama bonds are offered.

  • Posted by Cedric Regula

    WStroupe: “What guarantees could the U.S. Treasury offer China that would ok it to deepen its exposure?”

    I have really been wondering what China has in mind here. The USG could make guarantees that it will jail US taxpayers and confiscate their savings to make payments to China, but that sounds politically sensitive here in Amerika and could lead to political instability of the sort that China always says is a big concern over there.

    So realistically, I really don’t know what China is “waiting” for.

  • Posted by WStroupe

    Cedric Regula asked, “So realistically, I really don’t know what China is “waiting” for.”

    They’re waiting for “Obama Bonds”. They want the U.S. Treasury to issue Treasuries denominated in yuan. If they hold back long enough the U.S. will get desperate enough for foreign financing and it will cave to China’s suggestion to do Panda bonds.

    These bonds would very effectively focus the dollar’s currency risks back onto the U.S., and away from China. And the Panda bonds would allow China to lend its excess dollars to the U.S. and get paid back yuan. So China would have a powerful mechanism it could use to diversify its reserves out of excess dollars.

    Google Panda Bonds, Carter Bonds and see what I mean.

  • Posted by Cedric Regula

    Also, if we issue Panda bonds denominated in RMB, China doesn’t put any RMB into Forex markets, and Chinese industry accepts dollars in payment, so the USG can’t get its hands on any RMB to pay off the Panda bonds with.

    So we are a long ways from any new financial order.

  • Posted by Cedric Regula

    WStroupe:

    Ok, our posts crossed. Even if the Chinese did make the RMB a tradable currency, do you really think Larry Summers, or even TG and Ben would seriously consider non US denominated debt?

    I know you said we would need to be desperate, but the China/US trade and currency issue is still a situation of golden handcuffs, and I think both sides would curtail trade before Obama or any other admin would agree to denominate US debt in anything besides US dollars.

    I’m not quite so confident about our oil deficit however.

  • Posted by WStroupe

    Cedric Regula said, “I think both sides would curtail trade before Obama or any other admin would agree to denominate US debt in anything besides US dollars.”

    Jimmy Carter issued billions of dollars of “Carter Bonds” in the late 1970s when the U.S. Treasury became desperate for foreign lending to support the declining dollar. They were U.S. Treasuries denominated in German marks and Swiss francs. So there is already a precedent.

    See this cut-and-paste from RGE Monitor:

    Panda Bonds: Will China Allow More RMB Bonds? Will the U.S. Have to Start Borrowing in Foreign Currencies?

    Jun 7: On a visit to the U.S. Guo Shuqing, the chairman of state bank China Construction Bank (CCB) and former head of the State administration of foreign exchange suggested that the U.S. government and the World Bank consider the possibility of issuing renminbi bonds in the Hong Kong market and the Shanghai market. The bond issues could be relatively small — perhaps 1-3 billion yuan ($142 million-$436 million).
    The Chinese government has been reluctant to extend bond issuance especially to foreign corporations.

    Obstacles to issuance of RMB bonds by the U.S. government (or U.S. corporates) include: lack of convertibility of the RMB, desire of the Chinese to control bond issuance

    China has tended to use Hong Kong as a trial point for new financial instruments, including allowing Hong Kong registered banks like Standard Chartered and
    Bank of East Asia to issue RMB bonds. It previously allowed Hong Kong residents to increase their holdings of RMB deposits. China has been taking small but
    significant steps to increase the international role of the RMB including using the currency in swaps and use as a transaction currency in some regional trade

    Both the ADB and the World Bank’s International Finance Center issued panda bonds in October 2005 as part of attempts to deepen China’s domestic bond market. The IFC’s bonds (RMB 1.13 billion in 10 year bonds – $140m (at the time) were raised on behalf of three Chinese companies needing local currency finance. development of the bond market would allow such companies to avoid currency mismatches (IFC, ADB) These institutions were the first

    Yu: Panda bonds are a very useful vehicle that could not only help lend extra dollar reserves to foreign investors, but also effectively controls the risk of forex
    rate fluctuation. Given the riskiness of holding U.S. treasuries, foreign institutions could issue panda bonds. Strained for financing, foreign issuers would
    receive money in yuan by issuing Panda Bonds, and use the money raised to buy US dollars held by China’s financial institutions, and pay interest and
    principal in yuan, which can be bought at the foreign exchange market.

    Salmon: The World Bank and a few other habitual foreign-currency issuers should probably wade in before the US breaks with all tradition and borrow in any
    foreign currency. If the World Bank can start issuing in yuan, and if it can easily swap its obligations back into dollar Libor, as Guo suggests is possible, then
    that’s a great idea. A benchmark yuan yield curve would do wonders for increasing the transparency of Chinese capital markets.

    China’s domestic bond market remains relatively shallow with bonds making up very little of corporate finance. Expanding the market might not only allow diversification of the financing structure but also provide investment opportunities for Chinese investors such as pension funds, insurers etc. It might also allow
    the Chinese investors to avoid bearing the currency risk.

    Packard :There is a precedent for issuing foreign currency-denominated U.S. Treasuries. In 1978 the U.S. sold “Carter bonds” denominated in German marks
    and Swiss francs to attract foreign investors.

    Takahashi: Japanese economists, worried that the U.S. might try to repay its debts with a weaker currency are suggesting that the U.S. treasury issue bonds in yen -> Fukui: Yen-denominated US Treasuries would reduce currency risks for Japanese and Chinese buyers of US Treasuries

    China has the largest stock of U.S. treasury securities after Japan.

    Breaking Views: U.S. borrowing in euro or yen might avoid the crowding out effect in which the U.S. governments borrowing needs limit resources available for the U.S. private sector

    Setser: A collapse in private borrowing contributed to the rise in treasury borrowing. For now despite the increase in government borrowing, the U.S. external
    borrowing has actually fallen from 2007 levels as the trade and current account deficits shrunk.

  • Posted by Cedric Regula

    WStroupe

    Ya, well, what to do about fiat currencies. You either love’em or hate ‘em. I think the whole OECD loves’em nowadays and will close ranks vs. the BRICs and EMs.

    But I also think that all CBs should have tradable currencies(so once again the ball is in China’s court)and CBs should start doing their jobs and manage a basket of currencies that mirrors the trade weighting they do in the global economy. The excess reserves should be invested elsewhere besides treasuries.

    When you come down to it, the only thing that makes fiat currency valuable is what you can buy with it and what interest rate you can get for it. If it’s invested in sovereign bonds the default risk depends on the ability of the economy to generate wealth, and the ability of the government to collect taxes.

    If they think they can make that work any other way, they are deluding themselves again.

  • Posted by Indian Investor

    Dr. Setser, Thanks for your previous clarification. In February 2009, there was a massive increase in custodial holdings of Treasuries at the Fed. Here’s the weekly break up and the total from the H.4.1 release:
    Week Ended Feb 04 – -$2.40 b
    Feb 11 – + $8.35 b
    Feb 18 – + $19.39 b
    Feb 25 – + $ 4.33 b
    Mar 04 – +$12.58 b
    The total increase was $29.67 b without the week ending Mar 04 data, and $ 42.25 b with that week’s addition.
    In feb 2009, China sold $ 2 b worth of LT Secs on its own account and another $ 818 million worth of Treasuries were sold through the UK that month. This implies that China had a net sale of around 2.545 b in February in the long term segment, or at least the $ 2 billion if you don’t count negative amounts through the UK as China’s sales.Int he short term segment, China’s holdings decreased to $236 in Feb 2009 from $ 248 b, and the precise decrease in millions turns out to be $11,230 million, or $11.2 b.
    The total short term US liabilities also decreased in February, from $4,359 b in Jan 2009 to $4,243 b in Feb 2009, a worldwide total decrease of $545.33 b in short term US securities outstanding to foreigners.
    When I looked at purchases of long term US Treasury Secs in February, I found a big surprise.

  • Posted by Indian Investor

    In February 2009, Japan bought $25.855 b worth of Long Term Treasury Bonds.In that month, China sold a total of $964 million worth of LT Treasury Bonds, and had a net sale of $2008 million worth of long Term US Secs in all. The rise in the Fed’s custodial holdings in February, to the tune of around $ 29.67 b for the four weeks till the week ending Feb 25, 2009 seems to be explained by a huge purchase from Japan in that month, not China. In Feb 2009, China was a net seller of US Treasuries, both short term and long term, according to the TIC data. Is it possible for you to go through this data and see if I’m looking at the right numbers?

  • Posted by Cedric Regula

    Indian: re jap surprise

    Not so surprising really. Japan’s private sector has been traditional buyers of long term treasuries due to ZIRP and QE in Japan. Back in Feb, the yen was extremely strong at 90/dollar(safe haven effect). Then the 4Q data hit showing a collapse in exports. Everyone thought the BOJ would weaken the yen, so they headed to the US.

    Unfortunatly for them they bought into the 10 year at a 2.5% yield. The yen has weakened somewhat to 98, but I think they must still be underwater on those purchases.

    The Chinese were smarter by sticking with the short end of the curve.

  • Posted by bsetser

    indian investor — in february Russia and others were still shifting out of agencies and s-term bank deposits and into treasuries. you need to look at the whole ensemble of the data, not just the data for china and japan. and there isn’t a perfect correlation.

    that said, there is a strong pattern of faster growth in the custodial holdings in months where major asian banks are big buyers (based on reserve growth), and clearly much of the flow is routed through london. the tic web page gives the same explanation for the discrepancy that i do — namely that securities bought in london are handed over to the fed for safekeeping in the custodial accounts, and since there is no sale associated with the transfer of custodianship, it doesn’t enter the tic data.

  • Posted by bsetser

    cedric is also right to highlight that the tic country data captures prviate as well as public purchases and for japan private purchases are important.

  • Posted by jonathan

    Just wanted to add agreement to your last point, that this is ultimately healthy. I would go further and argue it’s important to the reform needed in the US.

  • Posted by MakeMeTreasurySecretary

    WStroupe: “Jimmy Carter issued billions of dollars of “Carter Bonds” in the late 1970s when the U.S. Treasury became desperate for foreign lending to support the declining dollar. They were U.S. Treasuries denominated in German marks and Swiss francs. So there is already a precedent.” The conditions were very different then. US did not have a clearly overvalued currency. US exports exceeded US imports until 1975 or 1976 and capacity utilization was high. So it made a modicum of sense to borrow in some other currency. Still, I would consider that these measures were not needed even at that time.
    Now, part of our economy’s problem is that we have an overvalued currency exactly because there is too much demand from abroad for US assets (mostly US bonds simply to influence currency rates). If anything, the Fed should buy all new issues of US bonds and also sell US dollars to buy other currencies, like buy Brazilian bonds denominated in reals. It would be a market intervention but it would just cancel other market interventions.
    My view is that market forces can recognize a seriously overvalued or undervalued currency and can set in motion the correction of the mispricing. The idea that we should go begging for financing that we do not need in order to prop up a currency that is overvalued strikes me as outright masochistic and devoid of economy rationale. However, this idea probably has political rationale and motivation and most of the cries ‘the bond market will punish us and international buyers will shun us’ come mostly from a given corner of the political spectrum.

  • Posted by WStroupe

    MakeMeTreasurySecretary,

    I want to clarify my position. I’m not recommending the U.S. Treasury start borrowing in foreign currencies. I’m simply making the observation that the world’s big lenders increasingly want the U.S. Treasury to do so. I think they’re moving toward making their currencies convertible – part of that move is to “what-if” it in their policy discussions, sizing up all the +s and -s of doing it. But I think they’re leaning pretty well toward making their currencies convertible so they can play a bigger international role going forward.

    Also, these foreign lenders are not doing much net buying of Treasuries. They’re very reluctant to do so, and they’re letting others (domestic U.S. savers, private foreign investors) take on all the new supply of Treasuries coming online. The lenders know that won’t cover it and keep yields from escalating, but they’re not interested in doing the heavy lifting for the U.S. Treasury anymore. Period. So the U.S. finances will become more troubled and the U.S. position will become weaker, and foreign CBs are ultimately going to get what they want from this administration – Treasuries denominated in foreign currencies – “Obama Bonds”.

    I’m just pointing out what I think their strategy is and the fact that the U.S. can’t do a whole hell of a lot to head them off at the pass if that’s really what the CBs are up to.

  • Posted by imapopulistnow

    MakeMeTreasurySecretary responds: “Now, part of our economy’s problem is that we have an overvalued currency exactly because there is too much demand from abroad for US assets (mostly US bonds simply to influence currency rates).”

    I agree. The longer the dollar is overvalued, the more difficult it will be to correct the structural imbalances. A good case in point is the auto sector. With the strong yen, Japanese autos are being priced out and domestic autos gained market share last month. Wouldn’t it have been much easier for the domestic auto industry to survive had this occurred say one year ago when total demand was much higher?

    We have a hollowed-out economy that has spent the last decade growing artificially off of financial engineering, global currency engineering and the resultant debt accumulation. A weaker dollar is an essential component to developing a more balanced economy that contains less consumption and more production, both for domestic use and export.

    Stagflation cannot be avoided (at least I cannot envision any scenario whereby it will be) and yes Krugman is correct – we will have a lost decade while we re-balance our economy, pay down our debts and live with muted growth in our living standards.

    Baring some miracle break though in productivity or low cost energy sources, it is going to be what it is going to be.

    So let us act responsibly, accept our fate without assigning blame that it could have somehow been avoided, take the necessary steps to devalue the dollar and let the repairs begin!

  • Posted by MakeMeTreasurySecretary

    Before this last election, many conservatives and libertarians considered the trade deficit a symbol of strength. Daniel T. Griswold wrote a report or book appropriately titled “America’s Record Trade Deficit: A Symbol of Economic Strength.” According to Griswold, the record deficit was fueling worry that it could hurt U.S. industry, destroy jobs, burden future generations, and cause the economic expansion to end in a hard landing. No way! claimed that author, at a time when U.S. industry was shrinking, jobs in industry were destroyed, and the overall debt (mainly the household debt at that time) was ballooning with unprecedented speed. All was well as long as the financial markets were doing well. I guess it never occurred to that author that an economy that is based on a favorable direction of the flow of funds is in a precarious position. “Just keep the money flowing in and all should be well.”

    Nevertheless, let us follow Griswold’s rationale because he does make a very good point: “Nations that are net recipients of foreign investment will run current account deficits, while nations that are net investors in the rest of the world will run surpluses.” Indeed! That is why I find it strange to worry that foreigners are not investing enough when we run such a large trade deficit. By the same token, when the flow of foreign investment into the US stops, the US will have to balance its balance of trade. When this happens, it will be a “healthy adjustment”, in Brad’s measured language. The sooner this happens, the better for all parties involved.

  • Posted by London Banker

    I wonder if the accummulation of custodial holdings at the Fed is rather akin to the accummulation of bank reserves to record levels in that both might be influenced by a collapse in velocity as risk averse lenders hold onto their funds/Treasuries.

    One factor in the recent rally little discussed is that collapse of securities lending/repo markets as risk averse lenders of securities withdrew assets from lending/repo pools and intermediaries. Central banks would do this by withdrawing their assets from investment banks and commercial banks and redepositing them at the Fed. During the risk-seeking years, central banks committed a fair chunk of assets to lending/repo to boost returns. That is likely unwinding after the experience of Lehman’s collapse, which saw lent/repo assets disappear.

    On the point of China getting rid of dollars to resource economies, this is absolutely happening. I saw a quote in a news story recently that Chinese were travelling the world with “suitcases full of dollars that we have to get rid of”. It was in coverage of a $10B loan to Kasakhstan to secure gas supplies and the western border areas. These loans and investments will not show up in the official statistics on Chinese holdings, but nonetheless allow China to diversity away from dollar risk.

  • Posted by Indian Investor

    Cedric/Dr. Setser,
    Thanks a lot, it does seem that expectations of Yen devaluation led to a huge purchase of Long Term Treasuries in Japan in Feb 2009. Looking at the total data throws up more surprises. I added up the ‘All countries’ total for Long Term US Securities, and the total short term liabilities to foreigners payable in dollars for the three months from Feb through March.Would you believe that in toto only $2,375 million flowed into dollar denominated securities, over the three months? In February,there was a massive sell off in short term dollar-denominated securities, amounting to an outflow of $115 billion. Also, when I totaled the data for China’s financing of the US over those three months, the total is -1.5b, excluding the imputation of UK Treasury purchases of $14.8 b to China in April. The conclusion is that when you look at China, including the data for official plus private Chinese investors, only around $15 b of financing came into dollar-denominated securities from China. Over those three months, Japan provided a total funding of $31.8 b to the US.However, Japanese financing seems to have dried off. Japan provided an inflow of $18.23 b in Feb, and $16.25 b in March, but in April, Japan caused a net outflow of $2.8 b from dollar-denominated securities. Here, I’m adding up both the short term and long term securities flows from Japan.The total for foreign official institutions is also available for net flows to short term and long term US Treasuries. (I looked at the column called ‘of which US Treasuries’ in the short term tables.)
    Foreign official institutions provided a net inflow of $87.86 b into US Treasuries, while there was an inflow of $32.30 b in February, and $50.57 b in March; net flows into Treasuries dropped to $4.99 b in April.
    I’m interested to know whether my calculations appear to be correct.

  • Posted by Cedric Regula

    Indian:”Would you believe that in toto only $2,375 million flowed into dollar denominated securities, over the three months? In February,there was a massive sell off in short term dollar-denominated securities, amounting to an outflow of $115 billion.”

    I don’t understand this part. You say massive selloff in “short term dollar-denominated securities”? What kind of securities? Everyone was pretty sure we had massive buying in t-bills.

    Fed QE was announced around March 11 I believe. The dollar index took an immediate hit, then went more or less sideways until late April, then began another swoon. Of course remember the RMB is not in the index, the Euro is, but they don’t play much on this side of the pond.

    http://quotes.ino.com/chart/?s=NYBOT_DX

    Note: I haven’t looked at the actual report yet, mainly because they say things like that, which I’m not real sure how to interpret.

  • Posted by Indian Investor

    Cedric, the change from the Jan to Feb period end shows a reduction of $115 b in liabilities to foreigners payable in dollars, in the short term securities data. From feb to apr, the total net inflow to dollar denominated securities for all the maturities was only $2.37 b. US purchases of foreign long term securities in this period was $22.85 billion. When I look for the total outflow data from the US to foreign securities, I don’t get the break up but I looked at the changes in ‘own claims on foreigners’ – that’s from the banking data and it shows an total outflow of $41.44 b for those three months. As of yesterday, Marketwatch and XE.com, based on the TIC release, report that the outflow of capital from the US is $53.2 billion only in April.
    China (including private and official) bought $5.6 b of short term treasuries in Feb 2009, $8.83 b in March 2009 and sold $14.78 b in April 2009. That amounts to a net outflow from short term treasuries of $346 million by China over those 3 months.
    From these totals, if there was a net outflow of capital from the US, that should have been reflected in major changes in exchange rates. Something isn’t tallying up.

  • Posted by Jehu

    MakeMeTreasurySecretary: “The idea that we should go begging for financing that we do not need in order to prop up a currency that is overvalued strikes me as outright masochistic and devoid of economy rationale. However, this idea probably has political rationale and motivation and most of the cries ‘the bond market will punish us and international buyers will shun us’ come mostly from a given corner of the political spectrum.”

    The economic rationale is to offshore the the economic burden of defense expenditures. If the financing is discontinued, the entire cost of these expenditures will come at the expense of domestic consumption and investment.

  • Posted by a

    “What guarantees could the U.S. Treasury offer China that would ok it to deepen its exposure? Panda bonds.”

    That might be an outcome they live to regret. It would be easier for the US if it could selectively default on some of its debt. If all the debt is the same (in USD), then the US can only either cut the coupons or haircut the nominal without being arbitrary. But if some of the debt is in a foreign currency, then the US can selectively default on those and keep whole the bonds in USD.

  • Posted by jonathan

    A quick kudo to London Banker. We get wrapped up in the moment that we forget the larger picture and, yes, velocity is way off and that has consequences.

  • Posted by Cedric Regula

    Indian:”Cedric, the change from the Jan to Feb period end shows a reduction of $115 b in liabilities to foreigners payable in dollars, in the short term securities data.”

    This is the suspicious part. I didn’t dig up the Feb report, but short term securities must mean something besides t-bills. There are short term mortgage instruments, ABS, and other stuff they may put in this category.

    Since 115B left the country in Feb, and the Fed announced QE in early March, if this was a stock, the SEC would be investigating for insider trading.

    But maybe it happened the other way around. The treasury had the numbers and gave the whisper report to Bernanke, that spooked Bernanke and he decided they needed QE because external financing dried up. I guess we will never know.

    “From these totals, if there was a net outflow of capital from the US, that should have been reflected in major changes in exchange rates. Something isn’t tallying up.”

    The dollar index went from 90 down to a low of 78, tho a big part of that didn’t happen till late April-May. We will have to see what the May TIC says. But that is a big drop in my book(which luckily I get to read upside down). The other thing is the gain in secondary currencies was much greater than indicated by the drop in the dollar index. This was due in part to less risk aversion and a rebound in non-majors stock and bond markets.

  • Posted by Ben, the drama Queen

    Indian, how do the $134 b suitcase outflows from EU to “others” relate to your Japanese numbers? What was the source of this outflow and where were they destined for – a “deposit”? Into a dot, composing many new comforting graphs for June/July/etc – due for release in earlier Fall, as the figures come-in/flow-out?

  • Posted by WStroupe

    a,

    If the U.S. Treasury cynically defaulted only on Treasuries denominated in foreign currencies it would be a most transparent power play that would without question get a tremendous backlash. The U.S. is already wounded on the world stage. Would it risk such a backlash, which could come in many very costly forms, far outside the financial arena? I doubt it. Besides, when you’re the U.S. Treasury, you can’t count on maintaining vital international confidence if you just end up playing a ‘confidence game’, and that’s what your suggesting the Treasury would/could do. I don’t think it could do so.

  • Posted by locococo

    Nevertheless it did so and it continues to do so …

  • Posted by locococo

    In fact the big q looking for an answer is – what happens when some day it stops?

  • Posted by yoda

    China wants weak currency? you are delusional. China wants a stable currency not a weak currency. check Forex before talking non sense.

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