Wednesday, April 22, 2009

Who's buying what? Well it's not risk!

I've been looking at the Treasury International Capital System (TIC) data to asses who's buying what? Or more specifically, who has bought what? February marked the second month of net capital outflow, -$244 billion total, driven primarily by a $268 billion outflow of change in banks' own net-dollar denominated liabilities. But on the upside, the net-acquisition of high-quality longer term assets (Treasuries, corporate bonds, agencies, and corporate equities) grew $22 billion, only its second increase since September 2008 when foreigners started fleeing U.S. risk.

I will not assess the February TIC data - that's Brad Sester's arena - rather look at the trends in net long-term acquisitions of U.S. assets since 2000. Overall, I see the following trends:
  • Private foreign investors dumped all risky assets, including agencies (which only recently became "risky"). A relatively large bubble in corporate bonds formed.
  • The U.K. still buys agencies; perhaps a floor under equities and corporates has been found.
  • Japan has become a net-seller of agencies.
  • China bought agencies, corporates, and even some equities; it has been selling off agencies for Treasuries since the middle of 2008.
Private foreign investors have been unloading all risk.

The chart illustrates the 12-month rolling sum of net private TIC flows (lines 4-8 on the release) through February 2009. The trend is clear: news of the subprime mortgage crisis resulted in private foreign investors fleeing everything but Treasuries. Perhaps an appetite for risk may re-emerge, as private investors were net buyers of agencies, $4.6 billion, and corporate bonds, $3 billion, in February. Still a no go on equities, -$5.3 billion.

Japan switched up Treasuries for a slightly higher spread on agencies, but became a net annual seller of agencies in January 2009.

Note: All country-level data represents net-foreign purchases of long-term assets by both private and official agents. You can find the data here. Each graph illustrates the net flows over a year as a 12-month rolling sum.

Japan started to buy U.S. equities in 2008, but generally it buys riskless assets, where since 2005, that has been agencies. In November, Japan started to ramp up its Treasury purchases, accumulating a huge $26 billion in February.

The U.K. buys agencies. Has a bottom been found for the U.K. net acquisition of U.S. corporate bonds?

Among the three economies listed in this post, Japan, the U.K., and China, the U.K. was the only one to buy agencies in February, $4.6 billion. Also of note, was the chunk of corporate debt purchased by U.K. private investors, $7.5 billion.

China generally does not purchase U.S. equities - only bonds and agencies.

China saw agencies and Treasuries as substitutes in 2007 and 2008; this can be seen by the sharp drop in Treasury accumulation in 2007 and the contemporaneous surge in agencies holdings. Now all bets are off: China wants only Treasuries, although annual accumulation slowed since August 2008, selling off $0.96 billion in February. China is now buying short term assets rather than long term.

So I guess the question at this point is this: how long until foreigners return to riskier long-term purchases? I will spend some time thinking about that; but eventually, foreign portfolio managers will seek out higher yields than the short-term assets that are paying near-zero income.

Rebecca Wilder


  1. It seems that a lot of investors will wait until more stability displays itself. Given the excess of risk in the past, managers will probably err on the side of caution and stay with short term assets. There is much conflict in all the financial news these days to make one pause.

  2. I see things the same Janie, I saw a report today which supposedly was a leaked version of the stress testing for the banks. It looks grim, so maybe until the financials bottom out, and mark their assets to market, well and maybe until the stock market bottoms as well, the risk aversion will continue.

    Here is the link to the stress tests of the banks.

  3. An economic rebound will (1) increase consumption and (2) increase the trade deficit (3) and increase the global imbalance or surfeit of foreign dollar denominated claims.

    This will perpetuate downward pressure on the dollar's exchange value. It will contribute to overall price increases and it will lower real economic growth.

    I.e., stagflation will become a permanent economic condition and our twin deficits will be largely responsible for a vastly lower standard of living for the majority of Americans.

    The U.S. is not competitive world-wide.

  4. So I guess the question at this point is this: how long until foreigners return to riskier long-term purchases?
    Maybe when "The House" begin to run an honest game again:

    There is no way that anyone will assume any risk when the outcome is driven not by the market but by intervention, with crony insiders in on the deal (the insiders are not taking risks either - they Know the outcome).

    From the outside observation point outcomes are essentially random, but Always against The Outsider.

    On a similar note:

    WHY, oh Why, does anyone even CARE what numbers the communist Chinese administration cooks up?

    The crash in shipping rates, the blatant defaults on future contracts and the price of raw materials are better indicators for what really goes on with China.