The Curious Case Of Bloomberg's Persistent Treasury "Demand" Disinformation Campaign
Less than a month ago, Zero Hedge thoroughly debunked an article written by Bloomberg's Susanne Walker and Wes Goodman, titled "China Adding to $1 Trillion of U.S. Debt Caps Rise in Rates" which had one purpose only: to eliminate public panic arising from the imminent removal of the Fed as a buyer of first and last resort, and attempt to convince naive readers that China is in fact adding to its holdings. To wit: "China, the largest investor in U.S. government debt after the Fed,
increased longer-term notes and bonds by 39 percent to $1.145 trillion
in December from a year earlier." As we showed previously this statement was based on a completely unfactual apples to oranges comparison of pre and post-revision TIC data, further showing that if the authors had conducted their analysis properly it would have actually shown a decline in China's Treasury holdings in a 12 month period. Then in a development so ironic it would even make Alanis Morisette blush, we disclosed the very next day that Bill Gross dumped all of his Treasury holdings, pending an answer to the question of "who will buy US Treasurys once the Fed stops monetizing", immediately refuting Bloomberg's "all is rosy on the foreign front" argument, reinforcing our thesis that with the Fed gone, foreigners will promptly cease to co-bid alongside the bidder of biggest resort, and in essence ending any artificial attempts to make the US paper demand picture any better. Yet today, less than a month later, Bloomberg's Daniel Kruger, in an article titled "Fed Exit Means No Pain for Obama as Foreigners Buy 60% of Notes at Auction" repeats precisely the same mistakes as his colleagues which we have since corrected, cheery picks some other data, and goes on to present a goalseeked argument to a conclusion that once again appears to have come from "above." Frankly, we are stunned by this persistence to refute Bill Gross' (not to mention Zero Hedge's) factually based view that foreign demand is declining materially for US bonds, and without QE3, it is very possible that it may disappear entirely. So allow us to debunk Bloomberg's second attempt (which we again hope is merely a function of misunderstanding of the subject material) at outright factless spin.
First, Kruger repeats the same mistake as his colleagues Walker and Goodman did less than a month ago, and which we took the time to correct:
Foreign investors owned $4.45 trillion of Treasuries as of January, up from $3.7 trillion a year earlier, according to the government. China, the largest overseas lender to the U.S., held $1.15 trillion of the debt in January, up from $889 billion a year earlier. Japan’s stake grew 16 percent to $885.9 billion.
Since apparently nobody is aware that the TIC data is revised on a periodic basis, we will again present how the data looked like pre-revision. From our previous post:
The farthest back one can possibly go back using the most recent data is June 2010, when the revised data begins. Bloomberg, however, completely ignored this, and based its entire article which somehow was supposed to confirm that foreign investors are not concerned about US inflation, and thus are adding to their holdings in droves, based on apples and oranges data.
What would the data look like if Blomberg had used a data series that is actually apples to apples, so that the December 2009 Chinese holdings of $894.8 billion data point is applicable?
Here is what Treasury data looked like pre-revisions (which includes the June 2009 and prior data as per the revised "Old Series" - luckily Zero Hedge now archives all obsolete, pre-revision government data just for these situations):
is rather apparent is that instead of a surge from $894.8 billion to
$1,160.1 billion, or a 30% increase in Chinese holdings, as incorrect as
it may have been derived, using just the old data series, Chinese
holdings actually declined to $891.6 billion! Of
course, this calculation is also irrelevant as the US Treasury revised
holdings halfway through the year, and therefore neither of these
comparisons are actually relevant any longer.
Hopefully this is merely a trivial mistake, although by now we would think Bloomberg editor Dave Liedtka (who oddly edited both articles yet appears very much inexperienced in dealing with Treasury data) would have at least a rudimentary understanding of TIC data.
Yet where the Kruger article gets into cherrypicking data is what really disappoints us and makes us truly wonder about the objectivity of Bloomberg. Kruger says: "The class of investors that includes foreign central banks
purchased 60 percent of the $66 billion in benchmark 10-year
U.S. notes sold this year, up from 42 percent in 2010. Fed data
show banks have increased their holdings of Treasuries to the
most since December, as a panel of bond dealers and investors
that advises the government says lenders may double their stake
to $3.2 trillion in 2016." Kruger is correct about the take down of the 10 Year auction, however, he ignores to mention that it is skewed far higher due to the outlier February auction in which Indirects took down a record 71.3%. An in fact in during the QE2 regime (from September 2010 when QE2 was priced in, through March 2010), the 10 Year has averaged a far more modest 53.6% average purchasing rate (take down). And just like in late 2009, early 2010, the foreign take down for the 10 Year is starting to drop precisely on expectations of the end of quantitative easing (not teh plunge from September 2009 to January 2010).
Next, and this is far more grievous, Kruger completely fails to mention that the Indirect take down of all other bond maturities is far lower than the 10 Year as the below chart demonstrates.
Indeed, while foreigners have an interest in the 10 Year, it is more than offset by a lack of interest in the short-end of the curve. Average indirect take downs in 2011 of the 2 Year are 30.4%, of the 3 Year: 33.8%, of the 5 Year: 40.5%, of the 7 Year: 50.4%, and of the 30 Year: 40.7% - confirming that pretty much everywhere across the curve except at the 10 Year position the Fed is the primary buyer. Alas, you will not find this far less than flattering data anywhere in Kruger's analysis.
But where Kruger's analysis falls completely on its face is when looking at Treasury securities held in custody for foreign officials and international accounts, or specifically the place where the bulk of foreign purchases are parked: this is also the best place to get information on weekly foreign demand for US paper, since the Treasury International Capital is not only inaccurate, but comes out with a three month delay. And here is where the data gets really ugly.
Let's cut straight to the chart:
The chart really says it all: in the three months of 2011, foreign demand has been the "flattest" since the start of the financial collapse. Comparing the change in holdings from December 31, 2010 ($2.618 trillion) through March 31, 2011 ($2.637 trillion) shows a negligible increase of just $19.5 billion, or less than $7 billion per month! This pales even in comparison with the same anemic period from last year when this account changed by $54.9 billion. We wonder if Mr. Kruger can explain to us how a $7 billion run rate in UST purchases per month will sustain the $1.5 trillion in annual debt issuance to fund ongoing US deficits.
In addition, Mr. Kruger's analysis also completely ignores that in addition to gross issuance there are things called "redemptions" by the Treasury, or maturing bonds which constitute a cash outflow, an undetermined amount of which goes to Foreign lenders. Alas while it is impossible to break it down by how much Indirects received from the Treasury in maturing debt, we do know that of the $534 billion in gross issuance in 2011, "only" $339 billion was a net cash inflow to the Treasury, or net issuance. In other words $194.8 billion, or 36.5% of total, was redemptions! But this one will also not find mentioned in Mr. Kruger's piece, and this could easily skew the answer and explain why there was any interest in the 10 Year to begin with (or any other maturity).
But all of this really is moot as it only looks at primary market analysis, whereas as we wrote yesterday, the bulk of the action is and has always been in the secondary market, where the Fed monetizes debt on a daily basis via POMO. And here, as Zero Hedge demonstrated yesterday, a whopping 83.4% of net issuance (which is the correct number to look at, not the gross, or not net of maturities) since the start of QE2 has been monetized by the Fed. No if, ands, or buts. And no spin by any mainstream media can change this stone cold fact.
The bottom line is that when one removes the noise, the propaganda, and the misinformation, foreign interest in US Treasurys is dropping, and the Fed is a net buyer of more than every 8 out of 10 bonds issued.
We certainly expect foreign interest to plunge once (if) it is definite that QE3 is not coming. Yet that won't be the end of the world: interest will surely be there.... At a price. We expect that in the absence of QE2, the 10 Year to be fairly priced about 200 bps wide of where it is trading now, somewhere in the 5.50% range. Which, incidentally, will lead to a complete devastation in the US housing market, a plunge in short-end prices, a huge bear flattening in the market, and the next financial system collapse.
But something tells us Mr Kruger won't write about this particular story (nor will his "editor" David Liedtka be asked to edit on it.)
In the meantime, Zero Hedge will be happy to consult with any and all Bloomberg authors on the matter of Treasury issuance, a topic which it seems very few there have much if any experience with.
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