The most convoluted monthly report issued by the US Treasury, that of Treasury International Capital (TIC) flows was released on Friday, and it disclosed some troubling data points. While foreigners overall continued purchasing domestic assets, their appetite continues to decline. In particular foreigners increased their purchases of Treasuries marginally, while they continued selling off corporate bonds and agencies, while buying corporate stocks. Yet, most troublingly, the Big 3 (China, Japan and the UK) purchased the least net total of Bonds and Bills year to date: as the Fed now dominates the market for Treasuries, traditional buyers are becoming increasingly nervous.
- $23.9 billion of Treasury Bonds and Bills were acquired in August, a decline from $31.1 billion in July and $100.5 billion June.
- GSE holdings continued declining - it appears only the Fed has any desire to hold on to that toxic trash these days: $5.3 billion was sold in August, after $17.8 billion was sold in July and $8.6 billion was sold in June.
- Corporate bonds same story: $11.7 billion sold in August, after $20.5 billion was sold in July and $6.8 billion in June
- Equities continue being the only capital flow bright spot: desire for Fed sponsored risk is still rampant although much subdued: $17.3 billion was bought in August, after $21.4 billion was purchased in July and $104.2 in June.
In the red flag category, China reduced its holdings of US Treasuries from $800 billion to $797 billion. In August Mainland China purchased $15.4 billion of UST Bonds and sold $18.8 billion of UST Bills, for a net sale of $3.3 billion. The other two big purchasers, Japan and the UK, increased their holdings by $6.5 billion and $4.5 billion, respectively (more below).
Also notable is the continued increase of near-term UST Bill holdings by foreigners: even though August saw a nominal sale of Bills of $2.5 billion (compared to a $14.2 billion increase in July), the amount of Bills in UST holdings has nearly doubled to 25% from a pre-crisis average of 10-15%.
We present a more detailed look at Long-term (Bond) and Short-term (Bill) Treasury holdings by the Big 3 foreign purchasers: China, UK and Japan. The chart below presents the total UST purchases/dispositions by the Big 3 broken down by Long-Term and Short-Term:
Isolating merely the LT component, shows the dramatic spike in June purchases when it seemed that the market may finally succumb to what everyone then thought was a head and shoulders formation, or perhaps, and more accurately, deflation, as most foreigners jumped at the chance of extending their long-dated holdings. While we have not overlaid the rampant purchases by the Federal Reserve on this chart, it is obvious that even as 30 Year On The Run quoted yields have persisted high at over 4%, Big 3 purchases of LT Bonds have moderated, and continue to be in the $25 billion ballpark.
The chart of Near-Term UST purchases shows the dramatic volatility in Bill holdings by the Big 3. In this category, the UK and Japan are practically meaningless, with China dominating all the Bill flow. The China series took an unprecedented dive in June when China sold over $50 billion in short-dated USTs. The most recent data demonstrates that China is once again offloading Bills, this time almost $20 billion. Also on the chart is the Bond Equivalent Yield of 13-Week On The Runs, which at 0.13% in August is dangerously close to the lowest for the year, and lowest of all time. Therefore the only motivation to park money in Bills continues to be as a safeguard from Long-Dated disruptions, the possibility of inflation, market liquidity considerations, and, of course, as a way to avoid purchasing gold.
Putting all this together, and superimposing all the Big 3's purchases across the curve, and we see why the Federal Reserve should be concerned: in August the traditionally biggest purchasers of US Treasuries purchased a net YTD low of just $7.6 billion. Compare this to the $42 billion purchased in July and $55 billion in June.
The reason for this purchasing skepticism: the Fed's blatant tampering with the Treasury market. The largest UST customers now longer want a piece of the action, or if they do, it is a constantly declining one. Furthermore as we have pointed out, as September saw an unprecedented pick up in POMO repurchases, it is unlikely that foreigners restored any of their trust in the UST market. If August is any indication, September results (released in mid-November) will likely demonstrate a muted pick up in Bills, a reduction in UST Bond interest, with mortgages and corporate bonds being in the penalty box. The only question mark is whether the September equity action will have seen (been driven by) more foreign participation.