China v US money market funds

China’s purchases of US Treasuries in 2008 (Setser/ Pandey estimate): $245 billion

US money market funds purchases of US Treasuries in 2008, from the flow of funds: just under $400 billion

China’s purchases of US Agencies in 2008 (Setser/ Pandey estimate): $38 billion. That reflects $85 billion in purchases through July, and $47 billion in sales since then …

US money market fund purchases of US Agency bonds: $542 billion

China’s purchases of Treasuries and Agencies in 2008: $283 billion US money market funds’ purchase of Treasuries and Agencies in 2008: $942b

I am waiting for a round of stories pondering whether money market funds will continue to buy Treasuries and Agencies at their 2008 pace!

US money market funds holdings of Treasuries and Agencies rose by close to 350% in 2008, as their combined Treasury / Agency portfolio rose from from $392b to $1334b. That pace of growth of growth won’t be sustained. The large rise came from a low base.

But money market funds did hold more Treasuries and Agencies ($1357b) at the end of 2008 than China ($1233b) did.

And we already know, more or less, that China’s purchases of US bonds are likely to fade a bit over the course of 2009. At least the purchases by China’s government, as China’s reserve growth has slowed dramatically. China’s wasn’t buying enormous quantities of Treasuries in late 2008 because the US was issuing more. It was buying enormous quantities of Treasuries because it stopped buying other US assets. At some point, the reallocation of China’s portfolio toward Treasuries will eventually run its course – and China’s Treasury purchases will start to track its reserve growth.

Treasury purchases by other central banks will also fall; the oil exporters are running down their reserves to make up for the fall in oil prices and private capital is leaving emerging economies. The central bank bid ultimately tracks global reserve growth, and global reserve growth is down. That eventually implies fewer Treasury purchases.

What we don’t know is whether American investors will continue to buy large quantities of Treasuries at something like current yields.

Obviously large the end of large Chinese purchases – or net Treasury sales by China — could change the equilibrium. China never accounted for more than 10% of the outstanding stock of Agency bonds, and its sales there had an impact. Its share of the Treasury market is currently larger.

But so too could an end to the surge in Treasury demand from US investors …

The data for China’s purchases comes from Setser and Pandey’s updated estimates for China’s portfolio. We smooth the survey adjustments over the course of the year, but these estimates are based on the US TIC and survey data. Our methodology is explained here; we have updated our estimates thought to reflect the latest survey data. The data for money market funds come from table L121 of the Fed’s flow of funds.


Originally published at the Council on Foreign Relations blog and reproduced here with the author’s permission.

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