As new data on foreign investment pours in each week, I look to see whether the bail-out of our deficit continues. This week, purchases of Agencies by foreign central banks jumped $12B. Another $2B of Treasury debt was purchased. Because foreign banks last week added $2B and $20B, respectively, to these categories, the two-week total of foreign investment is back to a high level. See my article of February 14, 2004, where I describe this analysis in more detail. The chart below updates the view.

A two-week jump in purchases by central banks is not enough to signal a complete change in foreign buying of our Treasuries, but it bears watching because interest rates may not rise as quickly as I had expected. The quarterly view above still shows that foreigners are slowing their purchases. Interest rates are up and the dollar is down since I started this analysis, which is consistent with decreased buying.

Question

A reader recently pointed out that the custody holdings are only a portion of the total foreign investment in the US, and asked if the numbers might therefore not fully reflect the more comprehensive totals that are reported in the Treasury International Capital (TIC) system a month or so later. The answer is that if the custody holdings are a constant percentage of the TIC total, they are a useful sample, and therefore useful for prediction. The chart below shows that the percentage has indeed been relatively stable since 1988.

Ratios are less intuitive to interpret, so below I’ve produced a chart of both the total monthly data from the TIC and the portion taken from the weekly custody data (converted to monthly for comparison). These conversions are burdensome enough that this kind of analysis is not provided anywhere else I know of. This chart shows a similar pattern for total Treasuries held by foreigners, and the amount held under custody at the Federal Reserve for foreign central banks

The custody holdings data are a month more up to date than the total, and we see that such investments are not growing as fast as before. This may signal a slow-down ahead in buying of all Treasures to be reported next month. The next step would be to calculate how big the drop in purchases will be, thus predicting what the monthly TIC data may show. That could be food for an update next week.

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