There is every reason to believe that foreign investment has been floating the U.S. economy. When foreigners buy our Treasuries and Agency debt, this keeps the price high and the interest rate low. As new data on foreign investment pours in each week, I look to see whether the bail-out of our deficit continues. The emerging answer is no – the positive effects of heavy buying by foreigners are abating. See my article of February 14, where I describe this trend in more detail.
The quarterly sum of purchases by foreigners dropped again this week. Below is an updated chart showing foreign central bank purchases of Treasuries and Agencies held in custody at the Federal Reserve. It is the “early warning” data on how much – or how little – foreigners are purchasing.
Below is a closer look at the data for the latest month. Importantly, the amount is below zero, indicating that central banks actually decreased holdings.
Treasury International Capital system (TIC)
This week the US Treasury produced a monthly report on foreign buying of our debt. Despite being 6 weeks late, it is of interest because it includes additional forms of purchases, giving us a more comprehensive picture of foreign demand. Given the slow-down in buying seen in the custody data above, we were expecting that the TIC data would also show weaker buying than during the previous months, and it did: Net foreign purchases of both domestic and foreign long-term securities from US residents were $61.3 billion in December compared with $89.3 billion in November. In the chart below we see a modest slowing in foreign cross-border flows into the US. This number is obtained by adding foreign net purchases of US Treasuries, Agencies, Corporate Bonds, and Equities and then subtracting purchases of foreign Bonds and Equities.
The mainstream press is even starting to cover this story, although the details are not well understood. The biggest purchasers of US debt have historically been our trading partners like Japan and China, which have the biggest trade surpluses with us. It is logical to assume they are still the biggest buyers, but this is changing. Buying of US Treasuries has slowed from Japan, and Chinese purchases have not matched the country’s extremely large trade surplus. Buying from the Caribbean Money center banks has stopped completely. Currently, the only big buying is coming from the London money center. One interpretation might be that carry trades from the Caribbean, which were using longer-term Treasuries, may have slowed or moved to other investments with higher yields. London investment might be driven by higher oil revenues being recycled out of the Middle East. Most important, however, is the fact that Japanese buying is dropping as a result of a new policy not to actively intervene in propping up the dollar.
A look at the components that make up the foreign purchases gives clues as to possible effects on interest rates. One observation is that US Treasury purchases have been slowing more than other items. That is consistent with the slowing of purchases already reported in the Federal Reserve Custody holdings data. Buying of corporate bonds by foreigners stayed strong, and US purchases of foreign stocks and bonds expanded to a modest record as investments abroad look more attractive to Americans under a falling dollar. If the very biggest players in international buying of our Treasuries are indeed slowing their purchases, and if US residents are becoming more interested in buying foreign stocks, this could indicate problems ahead for our interest rates.
My conclusion is that foreigners are slowing their buying of our government debt, and I believe this is likely to spur a rise in interest rates off of 40-year lows.