October International Capital Flows

In October, foreigners purchased $43.4 billion of domestic securities, a decline of $12 billion from the month before. This was offset by $22.7 billion of foreign purchases by US residents, for a net capital inflow of $20.7 billion. The bulk of foreign purchases was conducted by private investors ($28.8 billion) with the balance of $14.6 billion by foreign official institutions. Segregated by product, foreigners purchased $38.8 billion in Treasurys ($15 billion official, 23.9 billion private), sold $5.6 billion in MBS/Agencies ($4.1 billion sold by privates and $1.5 billion sold by banks), sold $0.5 billion in corporate bonds, and purchased $10.6 billion in stocks, mostly by private entities. The most notable result was that the big three traditional purchasers (China, Japan, UK) were, for the first time in 2009, net sellers of Bonds and Bills, with a $74 billion decline MoM, to a net sale of $29.5 billion in October.

As expected, an LTM analysis of TIC indicates why the Fed is still critical in maintaining a visible bid under the MBS market. In the latest twelve months, foreigners purchased $33 billion in Treasuries, sold $4 billion in corporate bonds, even as Americans have bought a more than offsetting $92 billion in foreign bonds indicating the thirst for fixed income will not be satisfied no matter how deranged Cramer's lunatic ramblings become, purchased a whopping $123 billion in stocks and sold $81 billion in Agencies. As Calculated Risk points out take out the Fed, and you will still have buyers at the right price. Of course if the right price is 20% lower than the current price, maybe having no buyers at all would be preferable.

The top holders of US Treasuries were the traditional three: China ($798.9 billion, flat sequentially as China's interest in UST holdings evaporates), Japan ($746.5 billion, a 5 billion decrease) and the UK ($230.7 billion, an $18.6 billion decrease).

Total purchases by the Big 3 (China, Japan, UK) plunged by $74 billion month over month, resulting in the first combined monthly sale of $29.5 billion in 2009. China bought $7 billion in Long-Term Bonds, and sold an identical amount of Short-Term Bills, for a net flat position in October. Japan did nothing in Short-Term positions and sold $5.1 billion in Bonds, while the UK and Channel Islands (a proxy for Hedge Fund Activity) sold $32.2 billion in Bills, which was expected since the 3 month Bill was 0.06% on October 31,  while buying $7.7 billion in Bonds.

The following table summarizes the Top 10 buyers and sellers of US Assets in September:

A granular view of buyers by various asset classes is presented by the table below.

Hedge funds (transactions based in the UK+Channel Islands and the Caribbean)  sold $27 billion in Bills, while buying $6 billion bonds, bought $5 billion equities, $3 billion in corporate bonds, and $1 billion in Agency and MBS.

The big picture is that international inflows continue slowing down and the traditional big 3 purchasers in fact were net pukers of US holdings, with $30 billion in monthly sales by the traditional big purchasers. Agencies/MBS just can't catch a break: Japan sold $7.6 billion, China $1.6 billion and Carribean countries selling $1.3 billion. The only notable agency buyers were the UK ($2 bn), South Korea ($2 bn) and Hong Kong ($1 bn). In three months, when MBS/Agency QE ends the bottom will fall out of the mortgage market.