Foreign purchases of US Treasuries: near the tipping point?

[c1ue]

I haven't looked at this in a while, but did so today.

What's interesting is the January 2011 to June 2011 trend (or lack thereof):

	Jul	Jun	Month	May	Apr	Mar	Feb	Jan	FY 2011	Dec	Nov	Oct	Sep	Aug	Jul
Country	2011	2011	Change	2011	2011	2011	2011	2011	Change	2010	2010	2010	2010	2010	2010
China, Mainland	1173.5	1165.5	8	1159.8	1152.5	1144.9	1154.1	1154.7	18.8	1160.1	1164.1	1175.3	1151.9	1136.8	1115.1
Japan	914.8	911	3.8	912.4	906.9	907.9	890.3	885.9	28.9	882.3	875.9	873.6	860.8	832.5	817.3
United Kingdom 2/	352.5	347.8	4.7	345.1	332.5	324.6	295.7	278.1	74.4	270.4	242.5	209	190.5	181	107.2
Oil Exporters 3/	234.3	229.6	4.7	229.9	221.5	222.3	218.8	215.5	18.8	211.9	204.3	207.8	215.4	211.7	209.3
Brazil	210	207.1	2.9	211.4	206.9	193.5	194.3	197.6	12.4	186.1	189.8	183	181	170.5	167.7
Taiwan	154.3	153.4	0.9	153.4	154.5	156.1	155.9	157.2	-2.9	155.1	154.4	154.5	153.3	153.4	153.8
Carib Bnkng Ctrs 4/	124.5	141.7	-17.2	149.7	138.4	155.2	169.8	166.9	-42.4	168.4	158.8	146.3	157.8	172.8	164.3
Hong Kong	111.9	118.4	-6.5	121.9	122.4	122.1	124.6	128.1	-16.2	134.2	134.9	135.2	131.9	133.9	131.2
Switzerland	108.4	108	0.4	108	106.1	109.7	109.6	107.4	1	106.8	106.8	107.6	110	113	111.8
Russia	100.2	109.8	-9.6	115.2	125.4	127.8	130.5	139.3	-39.1	151	167.3	176.3	173.3	173.7	175.7
Canada	83.4	81.4	2	87.8	85	90.4	90	84.3	-0.9	75.3	75.6	66.1	56.5	44.9	43
Thailand	65.2	62.6	2.6	59.8	60.7	57.1	57.6	56.5	8.7	52	52.2	52.7	50.4	47.3	40.8
Singapore	62.9	61.7	1.2	57.5	60.3	55.7	66.7	57.8	5.1	72.9	62.2	66.4	56.7	55.4	55.3
Luxembourg	61.4	69	-7.6	68.1	78.4	81.1	81	83	-21.6	86.4	81.9	78.5	86.1	79	98.9
Germany	61.4	62	-0.6	61.2	61.3	59.8	58.3	61.1	0.3	60.5	58.6	58.2	57.9	56.8	55.3
Turkey	41.9	41.9	0	39.3	37.9	36.2	34.3	32.9	9	28.9	29.1	27.8	27.8	29.7	26.7
India	37.9	38.9	-1	41	42.1	39.8	40.3	40.6	-2.7	40.5	39.7	40.1	40	37.9	38.4
Ireland	34.3	36.1	-1.8	33.5	40.2	44	42	44.4	-10.1	45.8	50	48.9	51.5	49.5	51.1
Belgium	31.3	33.6	-2.3	31.4	31.6	32.2	32	32.1	-0.8	33.2	33.4	33.4	33.8	51.9	34.3
Korea, South	29.4	29.9	-0.5	32.5	30.8	32.5	31.2	31.9	-2.5	36.2	39.8	39.4	38.7	39.9	37.6
Poland	29.3	28.5	0.8	27.9	27.4	28.4	27.3	26.3	3	25.5	27.2	28.8	28.4	26.6	24.8
Mexico	29.1	29.2	-0.1	27.7	26.7	28.1	34.6	34.4	-5.3	33.6	32.6	34.8	36.9	36.2	33.5
Philippines	24.7	22.6	2.1	23.6	23.9	23.4	22.7	22.8	1.9	20.1	19.2	18.5	18.5	19.3	20.3
Italy	24.3	23.7	0.6	25.4	24.8	24.2	24.3	24.6	-0.3	23.7	23.6	23.7	24.1	23.6	23.2
Netherlands	23.1	23.4	-0.3	23.7	23.6	25.1	24.9	25.4	-2.3	22.7	22.1	22	23.1	25.1	24.2
France	22.5	22.4	0.1	23.6	20.3	17.7	30.2	30.2	-7.7	15	20.1	23.5	23.3	26.1	19.8
Sweden	21.3	21.3	0	20.9	21.4	21.3	17.7	17	4.3	16.8	15.2	16.1	15.4	16.8	17.7
Colombia	20	20.1	-0.1	19.9	19.8	20.2	20.1	19.8	0.2	20.2	20.3	16.7	16.3	16.5	16.4
Chile	18	18.4	-0.4	18.9	18.6	16.7	16	15	3	13.9	13.4	13.4	13	13	13.1
Norway	17.6	20.4	-2.8	21.1	21.1	21.4	20.8	19.4	-1.8	19.6	19	18	18.1	17.5	16.3
Israel	17.2	18.3	-1.1	19.1	19.3	18.9	19.8	19.9	-2.7	20.6	20.5	17.9	17.6	16.3	17.9
Malaysia	13.2	12	1.2	12.7	12.2	11.2	11.3	11.3	1.9	11.5	11.7	11.6	11.5	11.7	11.7
Australia	13.1	13.9	-0.8	12.3	13.1	10.3	12.6	14.7	-1.6	14.9	14.9	15.7	18	15.5	19.2
All Other	210.8	212.1	-1.3	215.7	218.7	216.3	212.7	215.4	-4.6	219.2	230.5	232.1	234.8	236	232.6
Grand Total	4478	4495.6	-17.6	4511.5	4486.3	4476.2	4472.1	4451.4	26.6	4435.6	4411.4	4373.1	4324.2	4272	4125.5
Of which:
For. Official	3237	3238.9	-1.9	3240.6	3217.6	3182.9	3193	3184	53	3189.3	3212.4	3227.9	3192.7	3142.7	3098.8
Treasury Bills	391.7	407.5	-15.8	422.9	421.5	414.9	432.4	438.9	-47.2	462.3	499.2	531.3	495.4	486.9	473.5
T-Bonds & Notes	2845.3	2831.4	13.9	2817.7	2796.1	2768	2760.6	2745.1	100.2	2727	2713.2	2696.6	2697.3	2655.9	2625.3

For FY 2011 up until July, the total of Treasuries sold is a net of only $26.6 billion.

According to SIFMA: www.sifma.org/govtforecast3q2011/
Net issuance for Q1 and Q2 was a total of $399.93 billion, with another $362 billion net issuance for Q3 2011.

This means the foreign purchases of net Treasury issuance is now under 10% (under 7% in fact, maybe as low as 5%)

Looking further - there is also a shift from short term Treasury bills to longer/long term Treasury bonds, but clearly this shift is isolated to the few nations that are actually buying: principally the UK and Japan.

Of course some will probably argue that this is a short term 7 month anomaly due to Russia, Luxembourg, Caribbean banking centers, and Hong Kong all dumping Treasuries like mad.

[mmr]

Re: Foreign purchases of US Treasuries: near the tipping point?

The Fed's Z1 report for Q2 was released yesterday, and basically confirms this point.

Net foreign purchases of Treasury debt during the first half of 2011 as per that report were ~$50 billion (+$110 from official sources, -$60 from private sources), and foreign holdings of agency MBS dropped another $50 billion over the same period, bringing net investment in government and government-backed debt close to zero.

It would be an even worse sign if the data for August and September doesn't start to show at least some rebound in foreign purchases, especially given all of the European turmoil that began a month ago.

[lektrode]

Re: Foreign purchases of US Treasuries: near the tipping point?

i guess my only question is: will this 'sell off' result in upward pressure on interest rates any time soon (b4 year end)?

[globaleconomicollaps]

Re: Foreign purchases of US Treasuries: near the tipping point?

if foreigners are dumping treasuries who has been buying the 10 year (now up 90% )?

[lektrode]

Re: Foreign purchases of US Treasuries: near the tipping point?

uhh... anybody sides uncle ben?

[c1ue]

Re: Foreign purchases of US Treasuries: near the tipping point?

if foreigners are dumping treasuries who has been buying the 10 year (now up 90% )?

That is a good question, isn't it?

Either the American people are shifting all their savings into Treasuries (unlikely), or there is a massive sector shift away from the stock market, corporate bond market, etc into Treasuries(possible), or maybe somebody is adding a few extra zeros here and there via computer.

Whatever the cause, the fact that foreigners are not sending their money into the US for dollars is not a good sign.

[Chris Coles]

Re: Foreign purchases of US Treasuries: near the tipping point?

Not a wonder Geitner turned up in Europe this last week. But you cannot sell what others will not buy.

[*T*]

Re: Foreign purchases of US Treasuries: near the tipping point?

That is a good question, isn't it?

Either the American people are shifting all their savings into Treasuries (unlikely), or there is a massive sector shift away from the stock market, corporate bond market, etc into Treasuries(possible), or maybe somebody is adding a few extra zeros here and there via computer.

Whatever the cause, the fact that foreigners are not sending their money into the US for dollars is not a good sign.

Panic out of Euro banks. Surely short-term flows.

[c1ue]

Re: Foreign purchases of US Treasuries: near the tipping point?

Panic out of Euro banks. Surely short-term flows.

Do you mean American money in European banks?

Because European money in European banks would be counted, as would the European banks themselves, in the data.

[tombat1913]

Re: Foreign purchases of US Treasuries: near the tipping point?

June 27 2011 - http://wallstcheatsheet.com
"The Federal Reserve will remain the biggest buyer of Treasuries, even after the second round of quantitative easing ends this week, as the central bank uses its $2.86 trillion balance sheet to keep interest rates low. While the $600 billion purchase program, known as QE2, winds down, the Fed said June 22 that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system."

Sept 19 2011 - http://www.actionforex.com
“Following the continued deterioration in economic data, we expect the Fed to take action in the form of a twist in the central bank’s portfolio towards longer maturity government bonds. Unless we see significant improvements in economic data over the next couple of months we deem it likely that the Fed will initiate QE3 (buying either more government bonds or mortgages). This could happen either by end 2011 or early next year. We will particularly be looking to employment data, where we need sustainable and significant improvement in the coming months, in order for QE3 to be taken off the table. The Federal Open Market Committee (FOMC) meets on Wednesday and more information on QE3 is expected at that time. The main scenario for the Wednesday meeting will be for the Fed to start shifting its portfolio of government bonds towards holding more long-term securities and fewer short-term securities. This extension of the portfolio’s maturity is designed to push down long-term interest rates. We see this as a highly likely outcome of the meeting."

[*T*]

Re: Foreign purchases of US Treasuries: near the tipping point?

Do you mean American money in European banks?

Because European money in European banks would be counted, as would the European banks themselves, in the data.

Hm... isn't a major source of dollar funding for European banks the American money market funds? If they are going to the ECB instead and the MM are withdrawing, the money has to go somewhere, perhaps treasuries. Just a theory.

[mmr]

Re: Foreign purchases of US Treasuries: near the tipping point?

The big move down in rates started in the first week of August, and so any related increase in foreign purchases wouldn't show up in the data until the August TIC report (coming Oct. 18, apparently).

Money markets funds are limited to investing in short-duration instruments, which certainly helps to explain why key short-term rates (repo, etc.) have been pinned at / near zero, but wouldn't directly explain the move in long-term rates.

I can't recall the source, but I had noticed an article somewhere within the last week mentioning that primary dealers were buying up long-term Treasuries in hopes of flipping them to the Fed if QE3 is announced.

[charliebrown]

Re: Foreign purchases of US Treasuries: near the tipping point?

If the fed/treasury can significantly increase the duration of treasury debt, then does not this give them more power to raise short term interest rates without causing a funding crisis for the treasury? If short rates start going up now, I think the treasury has lots of short term bills and notes that would have to be rolled up to higher rates.

[mmr]

Re: Foreign purchases of US Treasuries: near the tipping point?

Short rates probably aren't the biggest immediate concern - the Fed has committed to keep one particular short-term rate very low through 2013, and can pump as much liquidity into the system as necessary to do so.

Another factor that will hold short rates down is that, if t-bill rates rise above the 0.25% that the banks can earn by parking cash at the Fed, it would make more sense for them to buy the higher-yielding t-bills. The banks have something like $1.5 trillion of excess reserves at the Fed that they could use for that purpose, especially if loan demand doesn't come back. That amount of demand should cap rates for a while, especially if money market funds continue to pull money out of foreign banks and alternative investments.

The Treasury Department posted a presentation on the topic of duration extension (link) that basically concluded that "Recent cycles of rising rates have not lasted long enough for maturity extension to pay off", but that "this time may be different" because:

o "Nominal rates are much closer to the zero bound than previous periods
o Deficits are very high historically and rising interest expense less acceptable
o Concentrated foreign ownership creates less reliable demand
o The benefits of funding attributable to being the reserve currency may be fading (The fact that there are not currently viable alternatives to the US dollar is a hollow victory and perhaps portends a deteriorating fate)"

They seem to be well aware of the risk, but (at least publicly) don't seem to be overly panicked just yet.

Of course, if a true currency crisis were to occur, all bets are off.