A few quick words on the November TIC data

China sold $9.2 billion of long-term Treasuries. But it also bought $38.2b of short-term Treasuries. China’s total Treasury holdings are up by $29.1b. By contrast it sold $3.1b of long-term Agencies and also reduced its short-term holdings by about $5 billion. China reallocated its US portfolio, but it hasn’t cut back on its dollar purchases.

The following graph, prepared with help from Arpana Pandey, plots the average increase in China’s reserves (defined broadly, to include hidden reserves) over the last 3 months v my best estimate (taking flows through London into account*) of China’s Treasury and Agency purchases. It speaks for itself.

china-treas-nov-08.png

The same story applies to the official sector as a whole. Central banks sold $26.2b of long-term Treasuries, but added $66.6b to their short-term Treasury holdings. Net central bank holdings of Treasuries — judging from the TIC data — rose by $40.4b. That is consistent with the $49.1b rise in the Fed’s custodial holdings of Treasuries. Central banks by contrast are reducing their holdings of short-term and long-term Agencies. They sold $14.3b of long-term Agencies, and their short-term holdings likely fell by a comparable amount.**

The countries that are really running down their Treasury portfolio — Korea and Brazil — are countries whose reserves are falling and need the cash. Russia is running down its Agency portfolio for a similar reason. It really needs the cash. Its short-term Agency holdings are down to $13.7b. They were close to $100b — 496.8b — in December of 2007.

The big stories in the TIC data, it seems to me, are:

– The ongoing reallocation of central bank portfolios toward short-term Treasuries. That reallocation has been huge. Central banks held $$276.8b of t-bills at the end of September. They hold $427.2b at the end of December. And judging from the Fed’s custodial data there is every reason to think that total rose in December. Foreign central bank demand for safe and liquid assets rose at the same time as private demand rose.

– The ongoing retreat of private capital from global markets, or what I previously called the reversal of financial globalization. Foreign investors sold $56b of US long-term securities in November, and another $36.6b in October. Central banks that needed cash to cover large capital outflows from their own economies or that simply wanted to shift to short-term t-bills accounted for the majority of those sales, but private investors were selling too. Americans have sold about $35 billion of foreign securities in each of the last three months as well.

As a result, the US trade deficit is now effectively financed by short-term inflows — including short-term inflows from central banks*** – and the fact that American investors are currently selling their foreign portfolio faster than (private) foreign investors are selling their existing US portfolio.

* London flows had no real impact on the recent data. ** The US reports data on short-term negotiable securities held by central banks and short-term Agencies held by all foreigners, but not short-term Agencies held by central banks. i have to extrapolate a bit. *** Some of these short-term inflows may be a reallocation away from private custodians, and thus may not represent a true increase in demand for US assets.


Originally published at the CFR blog and reproduced here with the author’s permission.