TIC-TIC-TIC: The Ominous Warning In Foreigners' U.S. Bond Positions

Tyler Durden's picture

Submitted by F.F.Wiley of Cyniconomics blog,

When data released last year showed China losing its appetite for U.S. bonds, it didn’t cause much concern. Sure, some bloggers took notice, such as the always alert Tyler Durden(s) in this post. But most pundits saw other countries picking up the slack and decided to “move along, nothing to see here.”

As of later this month, we’ll receive the final picture on China’s U.S. bond sales over late 2011 and early 2012, and the reaction isn’t likely to be much different than it was last year. But I’ll argue that there’s actually quite a lot to see. Namely, there’s a brand new reason to be concerned about America’s access to foreign capital.

Comparing annual and monthly TIC data

I’ll first share data from the Treasury International Capital (TIC) System’s annual survey of foreigners’ U.S. bond holdings. Those familiar with the TIC data know that these annual results are notoriously stale. Preliminary data was released on February 28th, with the final report due April 30th for a survey describing foreign bond holdings as of June 2012.

In other words, there’s a 10 month lag from survey date to report date.

But the first thing we learned from the preliminary release is that the annual survey didn’t add much information to the approximations published by the Treasury Department on a monthly basis. Thanks to new methods, which were introduced to fix large errors that used to occur in the monthly approximations, revisions were minor this time around.

The February 28th release merely confirms that China dumped U.S. bonds between the annual survey dates of June 2011 and June 2012, while other countries offset China’s sales by increasing their holdings.

Here’s the comparison of total foreign holdings of U.S. government bonds to China’s holdings:

tic tic tic 1

Now for the bad news

As I mentioned above, most pundits have sounded the all clear based on the continued increase in total foreign holdings. To see the bad news, though, we need to dig deeper. We need to ask who picked up the bonds that China’s no longer buying. And then more importantly, whether those increased purchases are sustainable.

To answer the first question, the chart below shows the top ten buyers of U.S. government bonds in the year ended June 2012, compared to the same countries’ average net purchases in the previous five years.

tic tic tic 2

Japan was the star of the bunch, adding $217 billion to its U.S. government bonds. But it wasn’t the only country to significantly increase its positions. With the sole exception of Brazil, each country in the chart set a new record for the change in U.S. bond holdings in a single year.

Now, moving onto the question of sustainability, we need to collect more information before developing an answer. We need a proxy for each country’s ability to absorb U.S. bonds on a consistent basis. And an excellent choice is the current account balance, which tells us how much foreign currency a country is generating naturally through global trade. It was China’s massive current account surplus, after all, that created the piles of dollars that it was able to recycle into U.S. Treasuries and other global assets in recent decades.

Take the five years from June 2006 to June 2011, for example. On average, China added $183 billion per year to its U.S. government bond holdings over that period. And over roughly the same period (I used calendar years for simplicity), its current account surplus averaged $293 billion per year.

China was spending about 60% of its current account surplus on U.S. government bonds, which seems a manageable amount.

But how about the ten countries in the second chart above? Collecting them into three groups (Japan alone in the first group, then the next four largest bond buyers, and then the five after that), I’ve compared their U.S. government bond purchases to the IMF’s estimates for current account balances in 2012:

tic tic tic 3

Defining unsustainable

These results suggest a whole new challenge in the quest for buyers of U.S. bonds. The old challenge was to sustain the status quo of large current account surpluses and correspondingly large U.S. bond purchases in China. We knew there were limits to the sustainability of these surpluses, but we also knew they can persist for a long time before finally correcting. And after corrections occur, such as in the global trade collapse of 2008/09, imbalances can return.

But today, we’re dealing with a different notion of unsustainable. As long as China was willing to buy huge amounts of U.S. bonds in recent times, it was more than capable of doing so. But you can’t draw the same conclusions for Japan, Switzerland, Belgium and so on. As shown in the chart, investors in these countries spent more than twice their aggregate current account surpluses to buy U.S. bonds in 2011/12.  This is much less sustainable than relying on China.

It simply can’t continue for very long.

The results shown above also explain the observation that all but one of the ten countries set new records for net U.S. bond purchases in the latest measurement year. They’ve never bought as many U.S. bonds before 2011/12 because they could only reach these amounts by reallocating assets from other investments, which isn’t something that can be done continually. Again, it’s unsustainable.

In a nutshell, America needs foreigners to be both willing and able to buy its bonds.

China is able but much less willing than it used to be. (Treasury data that isn’t shown here suggests its interest in U.S. securities recovered somewhat in late 2012, but remains far short of the levels of two years ago.)

Other countries are willing but not nearly as able as China, notwithstanding the sharp increase in purchases in the recent period.

And overall, the message in the preliminary TIC data is more worrisome than it may appear on the surface. Should the final report on April 30th confirm the message, consider it a warning of a potentially disastrous future decline in foreign purchases of U.S. debt.

(For another perspective on the limits to government borrowing, see “Answering the Most Important Question in Today’s Economy.”)

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lolmao500's picture

Good thing the fed is buying all those bonds. Not to mention the US pension funds... Just like Spain has been doing... Spain pension funds are being crushed for buying crappy bonds... Same thing will happen with US pension funds...

Don't worry, financial ``experts`` keep calling those bonds ``the safest thing there is``... lulz.

knukles's picture

The Obamanation thinks it's OK to piss on the landlord

Must be a cultural thing.

DJ Happy Ending's picture

Since Ben will print to make up the difference, why does it matter if China stops buying?

Big Slick's picture

 

I'm curious as to what China's decrease in US Treasury holdings would look like if China's USTs were simply maturing.  Can we really say from the data presented that China is "dumping" (i.e., selling) USTs?  

The Fed has up to date data that shows foreign holdings in house at the Fed (ZH has reported on this).  Curious to see how those data compare to these charts. 

 

XitSam's picture

And the ones that they roll over, are the same maturity or a shorter date?

nugjuice's picture

China won't stop buying our treasuries bc then we stop buying their trinkets. 

But srsly, Fed is buying all bonds and will continue to do so. Rates go up to 4% and gig is up. Debt service alone would be more than our current budget gap.

If you're asking me who you can loan $100 to that you will absolutely get back, then treasuries are the safest thing on the planet. Period. The smarter question isn't if you get the dollars back, but what those dollars are worth.

Great article but I think it came up short only in missing the next step. Its not China stops buying treasuries --> game over. Its China stops buying treasuries --> fed picks up the slack --> game over.

Let's at least make some money.. Ahem...fiat... in between

Urban Redneck's picture

China's foreign exchange reserves keep INCREASING and their UST holding depending on the time period are either nominally FLAT or DECREASING, which absolutely represents a DIVERSIFICATION AWAY FROM THE USD.

I don't see that the US has stopped buying their crap in retaliation.

Ghordius's picture

perhaps because a great part of this crap is designed in the US and built in China - increasing the coffers of the megacorporations who are listed in NY but produce in China?

the funny part of the whole deal is that for many years the Chinese would have preferred to buy stocks and land instead of bonds - but as for the Japanese before them too many "national assets" in the hands of foreigners creates political backlashes and blocks

Urban Redneck's picture

There isn't enough equity to go around... (even without the contingent demand for equity via derivatives) and I would assume CNOOC/Unocal went down in China about the same way the DPW fiasco did in to middle east which means there are more wealthy and powerful foreigners with a grudge not looking to prop up USD hegemony any longer than it suits THEIR interests to prop it up.  From all the talk about how well the Bush Clan and House of Saud get along I don't think most people realize how deeply the DPW move screwed the strategic partnership.

scamzino's picture

Your Xactly Rigt, TIC means Nothing Anymore!

Buck Johnson's picture

I know, also look at the top ten places and how easy it would be to set up a Fed operated shell company that is licensed in that country to buy US bonds and say it's in that country.  So really we could be buying those bonds in accounts over in those countries and just keeping them offshore.  When this whole mess implodes it will be nasty.

infiniti's picture

How can China buy more of our sovereign debt when the Fed and US banks are taking it all?

100pcDredge's picture

Japanese people seem2be very loyal... maybe. Especially after you nuked them?

John Wilmot's picture

It was wearing off though, hence the need for Fukushima.

daveO's picture

Wonder where they'll put that new Trillion they're going to print. Puppets!

saveUSsavers's picture

Why would ANY foreigner subsidize the US Military Energy Industrial Imperialism? Didn't they get the message yet?

rich_wicks's picture

Because if they don't, the US attacks them in every way imaginable.

John Wilmot's picture

You're asking why the imperial periphery subsidizes the imperial center?

Caesar says: you need to learn more about how empires work. Veni vidi I made you my bitch.

Schmuck Raker's picture

Why so glum chum, US IRAs and 401Ks can pick up the slack. Hell, the good ol' US Gov won't even ask, they'll just 'help' everyone 'invest'.

mind_imminst's picture

I don't get the point of this article. Who the f$%# cares if any foreign country is buying UST? If they all stopped buying UST tomorrow, the FED would pick up 100% of the slack. 

Waterfallsparkles's picture

Because the FED could lose Reserve Currency Status.  Then printing would cause hipper inflation like Zimbabwe.

Supernova Born's picture

Could?

All it good time, my nasty prolific FRN, all in good time.

FeralSerf's picture

Foreign countries buying USTs are NOT the reason the USD has Reserve Currency Status.  Foreign countries hold USDs because the USD IS DEFINED a RESERVE CURRENCY, (theoretically) "as good as gold" as least as far as currency reserves are concerned.

RockyRacoon's picture

Yeah.  And a belt is designated as a thing that holds up your pants... until you hang yourself with it.

Then it's called a noose.

FeralSerf's picture

There seems to be a lot of ignorance concerning what the definition of "reserve currency" is.  The dollar, sterling and gold were defined to be the reserves behind the various world currencies in the 1920s.  This was reaffirmed, in the case of the dollar and gold by Bretton Woods.  This is not my opinion.  It is historical fact.

Does the phrase "true by definition" mean anything to you?

 

emlab.berkeley.edu/~eichengr/rise_fall_dollar_temin.pdf

Ghordius's picture

you got it exactly... the wrong way round: reserve currency status is "bestowed" upon by foreigners - by buying up sov debt

John Wilmot's picture

Hey guy, it's just 30%, all the cool kids are doing it. 3% is like soooo last year.

Don't be a...http://www.youtube.com/watch?v=mi6tQthPDWc

daveO's picture

Look to Iran's survival for the answer. If the 'Petro Dollar' is subverted, then no need to funnel money back to UST's. China plans to replace it, sooner or later.

Supernova Born's picture

Your IRA (Individual Registered Account) is a "lead" for the solicitor who doesn't take no for an answer.

maskone909's picture

Long TMV bring it on muhfuckuhz

maskone909's picture

Paging Whiteknight

U still here buddy?

U still short t-bills? Small setback but still doin it

Waterfallsparkles's picture

Why would any Foreign Country buy out Debt when all we do is to try to deminish the value of our own Dollar?  Any Debt they buy is being depreciated at a substantial rate with Bernanke's printing.

Plus, China is trying to make its own currency more valuable.  By buying Gold and trading in its own Currency with other partners.

The Fed has ignored their mandate to keep the Dollar Strong.

CrashisOptimistic's picture

 

Examine the numbers.

There is no market as large as US Ts.  Anyone who wants to park somewhere liquid, parks there.  This is not debateable.  It's just reality.

The Fed is buying about 1/2 the US Ts that are issued by Treasury, presently.  45B/month, which is just about 1/2 of this year's deficit.  There will ALWAYS, repeat, ALWAYS be a demand for 500B/yr of US Ts by bond buyers, be they foreign or not.

The gold guys hate this and talk about how unsafe US Ts are, but that really is not the point.  There is nowhere else to go that has that volume and can absorb big numbers.  Bonds will be where fear goes because there is nowhere else big enough to go.  

Waterfallsparkles's picture

Just how safe are US Ts if 20% of the population are illegals and the other 50% are on the Government dole.  There is no one that will pay taxes to back stop the Treasurys.

The US needs tax payers to guarantee the safety of the Bonds.  Without Taxpayers and everyone on the Dole there is no one to support or repay the Treasurys.  Or ever repay the debt much less the interes.

FeralSerf's picture

US Treasuries are not backed by "the taxpayers".  They are backed by the right, title and ownership of The American People, i.e. the U.S. government's title to The American People has been collateralized.

 You and I and every other American are mortgaged.  All our stuff is mortgaged as well.

John Wilmot's picture

Indeed.

Government = taxfarm

Everyone, moo with me...mooooooo

CrashisOptimistic's picture

You don't seem to have gotten the point.

It's not a safety issue.  It's a volume issue.  If there's nowhere else to go, then that's that.  There's nowhere else to go.  It will be perceived as safe because there's no choice.

new game's picture

the issue becomes the amount of dollars , like a flood in your basement.

the dollar value starts dropping faster and faster -  that becomes the inflection point.

you get rid of it because it is losing value.  that is the course ben has us on.  quite simple.

85billion/month question is; when does the world say i want no more of your dollars. well, that is rearing its ugly head via misallocations.  first is the stock market.  second will be the math behind the us governments budget and its ability to continue paying interest and financing the deficet, all while less and less are working and paying less taxes.  just math and stockman and many others are warnig to deaf ears.

then shalom must print more and more or cause major disruptions to stock prices and/or lower bond values while he continues to flood the markets with dollars. the dollar loses value at an accelerating rate before getting discarded for better and safer places and sounder economies such as...

we are already beyond the point of no return, mainly because our sustaining industries are dislocated to lower wage countries and will continue as their is no desire by corporations to lower profit margins to employ you. and these corps are international in nature.  could tax foriegn profits much higher to reverse trend but then you are talking about democracy instead of facism-not happening.

only option is to continue taxing higher and siezure of personel property to keep this going till it doesn't go.

my guess is 60-70 percent taxation/theft before a revolt simmers, but then it is beyond any of the wildest wish/think/hope/change for resotation.

Urban Redneck's picture

Put another way- Basically every government is debasing their currency- i.e. printing digital banknotes and issuing bonds to offset the banknotes (Switzerland is quirky but I'll ignore that for now).  

It makes no sense for a central bank to hold its own government's bonds (because those bonds are intrinsically worthless when you are the printer of the banknotes, read that again & think about it- hint: for all intensive purposes the money supply is digital and the domestic "banknote" side of the transaction ledger entry remains on the balance sheet of the member/owner banks of the central bank).

So the central banks trade the worthless bonds of their own Governments for those of another government (which are somehow supposed to be less worthless, or perhaps staffed by bigger fools) and thus gain relatively valuable Foreign Exchange Reserves... as opposed to monetizing their own debt...

IT"S PURE INSANITY AND ACCOUNTING MANIPULATION.

fonzannoon's picture

They will go to gold, and price will solve everything.

flyingpigg's picture

Yes indeed, Treasuries for Gold: the great rotation Bitchez

yogibear's picture

The other countries can crush both the US federal Reserve and the ECB if they work it right. Pick up the peices and have the US and Europe connected to a ball and chains.

whisperin's picture

Perhaps we now have the real reason why "Bennie and the Fed" went to $85 Billion/month?

yogibear's picture

China and the rest of the world should all dump their US dollars and and all announce they did so afterwards and watch the panic.

Then announce they should announce their no longer accepting any more US dollars. They have a new backed currency. 

Immediately the BRICs raise their prices by several hundred percent. Watch  US inflation just soar several hundred percent while suppliers are crushed. Get Vietnam and the middle Eastern countries to join in. 

The Fed can't raise interest rates, otherwise it consumes all of the tax revenue. The fed can print all it wants into a worsening inflation picture.

It's a much better weapon than missiles or bullets.

Jason T's picture

We'd be looking at a new dark age for sure if that happens.  

Big Slick's picture

"Pearl Harbor didn't work so we got you with tape decks"

daveO's picture

They are in the process, now. They're signing trade deals that settle in Yuan. The 'big enchilada' is settling Oil trades outside the dollar. This will seal the fate of the Vampires in New York.