The basic constellation in the post-BoJ QQE, post-ECB QE world marked by large surpluses in Asia and Europe but not the oil-exporters has continued.
Inflows from abroad have come into the U.S. corporate debt market—and foreigners have fallen back in love with U.S. Agencies. Bigly. Foreign purchases of Agencies are back at their 05-06 levels in dollar terms (as a share of GDP, they are a bit lower).
And Americans are selling foreign bonds and bringing the proceeds home. The TIC data doesn’t tell us what happens once the funds are repatriated.
Foreign official accounts (cough, China and Saudi Arabia, judging from the size of the fall in their reserves) have been big sellers of Treasuries over the last two years. As one would expect in a world where emerging market reserves are falling (the IMF alas has stopped breaking out emerging market and advanced economy reserves in the COFER data, but believe me! China’s reserves are down a trillion, Saudi reserves are down $200 billion, that drives the overall numbers). But the scale of their selling seems to be slowing. As one would expect given the stabilization of China’s currency, and the fall off in the pace of China’s reserve sales.
Broadly speaking, I think the TIC data of the last fifteen years tells three basic stories—I am focusing on the debt side, in large part because there isn’t any story in net portfolio equity flows since the end of the .com era. The U.S. current account deficits of the last fifteen years have been debt financed.
The first is the period marked by large inflows into Treasuries, Agencies, and U.S. corporate bonds: broadly from 2002 to 2007. It turns out—and you need to use the annual surveys to confirm this—that all the inflows into Treasuries and Agencies were from foreign central banks. The inflow into U.S. corporate bonds then was not. It was coming from European banks and the offshore special investment vehicles of U.S. banks. And it was mostly going into asset backed securities.
This is the “round-tripping” story that Hyun Song Shin like to emphasize (Patrick McGuire and Robert McCauley have also done a ton of work on the topic). It is clearly part of the story. But it also isn’t the entire story: foreign central bank demand for Agencies and Treasuries was equally important and equally real. The funding of the U.S. current account deficit then took a chain of risk intermediation to keep the U.S. household sector spending beyond its means: broadly speaking, foreign central banks took most of the currency risk, and private financial intermediaries in the U.S. and Europe took most of the credit risk. Sustaining the imbalances of the time took both; and the private sector leg broke down before the official sector leg.*