Another baffling TIC data release
To be honest, I have a hard time understanding the May TIC data.
Overall inflows to the US were strong, obviously. Demand for US equities and corporate bonds was particularly strong, which does suggest the persistence of private demand for US assets abroad. Private investors tend to buy corporate bonds and equities; central banks tend to buy Treasuries and Agencies — though that is changing.
What causes me trouble is the split between private and official purchases, and specifically the absence of any official inflows in the May TIC data.
The TIC data has modest net official purchases of long-term bonds ($11.5b in total purchases, mostly Agencies), net official sales of t-bills (down $5.5b) and a fall in other short-term official claims. The net result: the official sector supposedly took 2.8b out of the US in May.
I have a hard time believing that. May was a record month for official reserve growth. China, Russia and Brazil all added to their reserves like crazy. Those three together combined to add close to $100b to their reserves – and a host of other countries were adding to their reserves too. That money has to go somewhere.
Suffice to say the large rise in the UK’s Treasury holdings – they rose $33.1b in May – suggests to me that the US data isn’t capturing a lot of official demand.
Moreover, the Fed’s custodial data doesn’t show a comparable fall off in official demand in May (June is another story). Between May 3 and May 31st, custodial holdings of Agencies rose by $28.45b (v a rise of $12.8b in the TIC data) and custodial holdings of Treasuries rose by $4.1b (v a fall, if bills are added in, of 10.1b in the TIC data), for a total increase of $32.55b. Add in the data from the preceding week and the increase is even larger.
What of the country-by-country data? It also doesn’t make any more sense. After adjustments are made for valuation effects, China by my calculations added close to $50b to its reserves in May. Its US holdings increased by a mere $6.85b. Long-term purchases of $10.07b (all agencies and corporate bonds, likely MBS) were offset by a $3.22b fall in short-term claims. China was a big net seller of Treasuries – or at least it allowed its total holdings to fall by not reinvesting maturing bonds and bills. Its long-term Treasury holdings fell by $3.2b, its short-term Treasury holdings fell by close to $3.5b. (data on long-term purchases here, data on short-term claims is here)
I believe that China is reducing the share of Treasuries in its portfolio. Korea, incidentally, also shifted from Treasuries to Agencies in a big way in May. But I don’t believe that China is putting less than 20% of its reserve growth into dollars – which means that there is a lot of Chinese money out there doing something somewhere.
Indeed, the UK’s big purchases of Treasuries even call into question the data showing that China’s holdings of US treasuries are falling. After the last survey, the UK’s Treasury holdings were revised down in a big way and China’s holdings were revised up in a big way. I am pretty sure the Bank of England didn’t buy $30b of US treasuries in May. I think analysis that looks only China’s purchases of Treasuries while ignoring Chinese purchases of Agencies is misleading — and worry about any analysis that assumes that the US data captures all of China’s purchases.
Russia added over $30b to its reserves in May. It did buy $6b of long-term US bonds (more than usual), including $4.1b of Treasuries (also unusual, Russia usually prefers Agencies). But it reduced its short-term claims on the US by $4.5b (largely by reducing its banks deposits), so its net US holdings only increased by $1.5b.
Brazil added $15b to its reserves in May ($14.6b to be precise). In past months, almost all of its reserve growth went into the Treasury market (in April, for example, Brazil added $12.3b to its reserves and bought $10.0b of long-term Treasuries). But not in May. Brazil only bought $2.15b of long-term US debt, and only $1.9b Treasuries. Its short-term claims went up by $3.55b –mostly from a rise in bank deposits. But the total increase in Brazil’s holdings was only $5.7b.
That does puzzle me a bit. With Russia and China I know not to trust the TIC data. I fully expect to see a large upward revision in Russian and Chinese US holdings when the next survey data is released. But the TIC data has up until now generally matched Brazil’s reserves growth. So a tiny part of me wonders if Brazil – which has had a very high share of its reserves in dollars – has started to diversify. Just a thought.
Indian reserve growth in May was lower than in the other BRICs, but it still added roughly $5b to its reserves (mostly in the last week of May). It certainly doesn’t seem to have added to its US holdings though. Its short-term claims on the US fell by $4.7b, with its holdings of t-bills falling by $4.55b. And its long-term holdings fell by another $0.2b …
Another buyer through London? Or another country diversifying away from the dollar? India already had a relatively low dollar share in its reserves, so if it really was diversifying, it likely would need to take the dollar share of its reserves below 50% …
And just to throw us all a curveball, the TIC data actually showed a fairly substantial increase in the holdings of the Asian oil exporters (think the Gulf). Their long-term claims rose by $3.85b (including $2.05b worth of Treasury purchases) and their short-term claims rose by $3.45b, for a total increase of $7.3b.
Talk about strange – the US data now seems to be doing a better job picking up flows from the secretive Gulf than from China …
17 Responses to “Another baffling TIC data release”
An alternative explanation would be that at non-distored prices/yields, the private sector is generally happy to finance the US external deficit. Interesting to note that equity inflows, for example, were quite strong.
By the same token, you are probably right that at least some of the “private” inflow may have been third party CB mandates…which of course would beg the question of why these guys stepped back from bidding at auctions themselves and hired someone else (and thus paying fees) to manage exposures for them.
re: non-distorted yields and prices, i would note that there are two issues — the price (yield) of the bond, and the price of the currency. right now the $ is too expensive (v. say the RMB) to be attractive at pretty much any reasonable yield, in my view. obviously it differs for Europe — the euro already has appreciated, the rmb hasn’t.
I also don’t think it is just third party mandates. there are also central bank purchases through intermediaries/ custodians — goldman ny sells to barclays london who sells to the PBoC … and then the PBoC shifts custodial holdings of that bond to the ny fed, so the increase in FRBNY custodial holdings is higher than the recorded official purchases. For now, i think this is the bigger distortion — and it (unlike the distortions created by outside managers) gets corrected when the survey data comes out. I also think it is likely — given the huge gulf between may reserve growth and the recorded inflows, even if you add all London treasury purchases to the official total, that there was a major buildup of offshore $ deposits in the int. banking system.
either that or there was a lot of diversification — and may was a pretty good month for the $ as months go, so that seems strange — the diversification would have needed to be overwhelmed by private flows (the equity inflows you mentioned)
This is pure conjecture and probably wrong besides, but maybe all those sovereign wealth funds have been those making “private” purchases not captured among “official” purchases.
Also, I am unsure of why China would make its official purchases take such a convoluted path as you describe in your comment. After all, it’s told the whole world that its reserves now amount to $1.33 T. China isn’t masking the fact that it’s piling on reserves at an astonishing clip, so why bother disguising the money trail?
The rising US economic/debt bond issue can’t be forgotten or ignored. I believe that the recent constant devaluation of the US dollar will invite major bond purchasers to move over to other currencies such as the Euro, putting further pressure on the US currency devaluation trend… Another possible problem is that the emergence of China and India as large and relevant commodities purchasers might encourage commodity and energy producing countries to move over to the Euro as a more stable denomination in which to price their goods. Imagine the uncomfortable effect on the US economy of constantly rising commodities prices due to the devaluation of their dollar currency. Also the US multinational corporations seem to be already factoring/feeding into their prices the US dolar devalution something that may highten inflationary fears in that country.
One economic columnist in an US major newspaper cited some analysts’ idea that currently the major Chinese export today is “deflation”, not industrial/manufactured goods, as we all might imagine… She also pointed out and that any real price hike of their yuan or any import restriction on Chinese goods may easily create substantial inflationary pressures in any major Western economy. Maybe that’s why the US government can’t really effectively pressure the Chinese Central Bank into significantly raising the value of their currency against the US$.
Foreign Buying of U.S. Securities Rises
Tuesday July 17, 12:53 pm ET
May Net Foreign Acquisition of U.S. Securities Rises to $112.6B
WASHINGTON (AP) — Foreigners sharply increased their buying of long-term U.S. securities in May, as appetite for corporate bonds and equities surged.
Net foreign acquisition of long-maturity U.S. securities was $112.6 billion in May, up from $72.7 billion in April, according to a U.S. Treasury Department report released Tuesday.
Foreign buyers, on net, snapped up long-maturity securities across the board: Net buying of corporate bonds saw the biggest increase, rising to $72.6 billion in May, up from $33.5 billion in April.
Net purchases of U.S. equities likewise jumped in May, hitting $41.9 billion, up from $27.4 billion in April.
i don’t think China is actively trying to disguise its tracks (unlike some in the middle east) so much as buying its dollar debt in the world’s current financial capital, one that happens to be open for at least some time during the Chinese business day. if china wanted to hide its tracks, it would need to take some lessons from some folks in the middle east about how to stay out of the survey data … not just stay out of the tic data.
that said, a lot of people do use the tic data/ the reported holdings of us treasuries on the us treasury web page as a guide for official demand. you sort of have to be in the know to know that the tic data misses most Chinese purchases. so there is some effective masking.
i probably downplayed the surge in foreign purchases of corp. bonds in the May data. some of that may be coming from banks in europe flush with dollar deposits from Central banks — or perhaps more central banks are shifting not just from treasuries to agencies but also from both treasuries and agencies to corporate bonds.
if so, they seem to have bought in at the peak …
the june data release should be interesting. i would expect a fall in long-term treasury bond purchases (both official and private), a rise in bill purchases, and a general fall-off in demand for US corp. bonds.
overall reserve growth was a lot lower in june than in may, so some of the fall off in demand for us debt is real. but there also may be some signs of big shifts in the kind of assets that CBs and SWFs are buying.
“ I also think it is likely — given the huge gulf between may reserve growth and the recorded inflows, even if you add all London treasury purchases to the official total, that there was a major buildup of offshore $ deposits in the int. banking system. “
Agreed, with some observations on the data and its classification:
TIC line 29 represents (it appears) the net change in the net foreign dollar liability position of domestic banks. For example, an increase in the net liability position represents a net international capital inflow at the margin – i.e. net funding at the margin for the US CA deficit via the banking system. The latest data point $ (7.9) billion is a net outflow. This means domestic banks exacerbated gross capital requirements beyond what is needed to fund the CA deficit (This appears to be a volatile monthly series).
In addition, suppose (for example) foreign CBs bought US $ 100 billion in FX, placing the proceeds in bank deposits. Since offshore banks ultimately clear to the US, the result would be a marginal capital inflow (classified as private). Given the total banking contribution is a net outflow of $ 7.9 billion, foreign private sources would be responsible in this example for an additional $ 107.9 billion outflow via the US banking system.
The $ 100 billion inflow comes from upstream CB outflows. But it is classified as private rather than official, because of intermediate interbank transactions. The TIC data thus obscures the classification of official dollar bank deposits offshore, as well as the change in those deposits.
“…The reserve managers’ responses made it clear that the world’s biggest pool of cash will be invested more aggressively than in the past. That means they will buy fewer U.S. government securities… What’s more, the responses illustrate that regardless of their financial muscle, central banks are no better than the private sector when it comes to predicting market moves…” http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aN6a0pCp8Wv4
Emmanuel asks why China would “disguise the money trail” by buying through London.
The objective of buying through London or other intermediaries isn’t to disguise the purchase of Treasuries, it’s to protect them against seizure by the United States government if official relations sour for any reason.
The US has a history of seizing the assets of anyone it doesn’t like from time to time (Iran, Libya, Iraq, etc.). As a result, risk averse central bankers have taken to holding their Treasuries through the global depositories – Euroclear in Belgium and Clearstream in Luxembourg – to get them legally outside the jurisdiction of the United States and secure from seizure. Canny investors in the Gulf states are doing this too.
There are few rights of judicial review or appeal for those who find themselves on the Treasury’s OFAC list of proscribed investors with frozen assets. Buying Treasuries and other US investments through non-US intermediaries and holding them offshore offers the only real protection for those who want to own US assets but fear the US government’s arbitrary exercise of power sometime in future.
London banker — good point and thanks for the comment. I suspect a similar logic also applies to Russia’s agency holdings — Russia certainly seems to hold both a declining share of its reserves in $ and a declining share of its dollars “onshore” in the US. I have been meaning to look more into luxembourg’s holdings of us assets for a while, and your comment reinforced that desire — i had assumed the large luxembourg holdings in the survey data were H. funds and tax-evading Germans, but I may have been way off.
Hi Brad. thanks for the piece. I’d encourage you to look closer at the UKs $26 billion (or 85%) of the European advance. I think this is where you’ll find your answer on petrodollar recycling (where reserve growth fits in). For a little while, the only trend i expect you’ll see from China on TIC is what you mention: away from USTs and into agencies. Good luck
One. No question that the Arabs are worried about potential asset freezes. They’ve good reason to be concerned. The Trading With The Enemy Act is still alive and well. Two. Is it possible that part of Britain’s TIC transactions are by Chinese banks operating out of London on behalf of the PBOC? And what about swaps? Where are they in the data? Or, aren’t they in the data?
The point on CBs holding treasuries offshore seems to drive a nail into the coffin of the DFG “reserves as collateral” argument, which Nouriel Roubini addressed in his recent paper.
thoughts of China, Russia and Germany alone, the U.S. isn’t the only nation which may be accused, historically, now and going forward, of being a bit heavy handed on the asset freezes and forfeitures – especially when there is so much room for misunderstandings about the ‘lawful’ allocation of wealth within and between nations, firms, owner/operators and citizens.
If avoiding the Feds is your primary reason for buying Treasuries offshore, surely it sort of defeats the purpose if you then give up your securities to the Fed to hold in custody. As Brad alludes, Fed custody holdings of Treasuries and Agencies rose $41 billion between the last week of April and the the beginning of June- hardly the behaviour of those trying to dodge asset seizure.
Irresponsible Federal Reserve “cheap money” monetary policy
It’s not surprising, because since Bernanke took over the helm of the Federal Reserve, the growth rate of the US M3 money supply has expanded rapidly to a 13% annualized clip, just shy of a 30-year high, and up from 8% in March 2006. Much like the ECB, the Fed is expanding the M3 money supply to immunize the US economy and stock market from sharply higher prices of crude oil.
The rapid expansion of the US money supply has sent the US dollar to its lowest level in 26-years against the British pound, an 18-year low against the Australian dollar, a 30-year low against the Canadian dollar, and an all-time low against the Euro. So oil exporters are quick to dump the US dollar and convert into appreciating currencies after initially accepting payment in the greenback.
A weaker US dollar, double-digit growth of the money supply, and sharply higher oil and food prices is a prescription for higher inflation. Most folks would probably agree with that. According to the IMF, food prices are 23% higher around the globe than 18-months ago, largely due to stronger demand for agricultural commodities to make ethanol and other bio-fuel substitutes for crude oil.
Of course, Bernanke’s sleight of hand is backed up heavily doctored inflation statistics, conjured up by government apparatchniks. The mainstream media relays the inflation propaganda to the public, with a stamp of approval from Wall Street economists. But with a hyper inflating stock market in the background, savers in the US bond markets are the big losers from Bernanke’s money printing operations.
Arab oil exporters are paid in heavily inflated US dollars, which are losing their purchasing power against the Euro and British pound. Arab oil kingdoms are keeping a tight lid on the oil supply to buoy prices, to offset the Fed’s devaluation of the US currency. It’s a vicious cycle that doesn’t end, until Helicopter Ben and his reckless cohorts in Asia and Europe, tighten up on the money supply.
my sense — and i could be off — is that the PBoC increasingly buys in london but hands over some securities to FRBNY. it is hard for me to otherwise understand the very strong growth in FRBNY custodial holdings — Brazil may do that as well, but it is too small to explain the numbers.
and the strange thing about the may data is that the gulf oil exporters who usually do buy through london and usually don’t show up in the US data showed up in the US data quite strongly, with a $7b net inflow — more or less what i would expect based on their current account surplus/ the oil price and the like.