from Follow the Money

Another baffling TIC data release

July 17, 2007

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To be honest, I have a hard time understanding the May TIC data.   

Overall inflows to the US were strong, obviously.   Demand for US equities and corporate bonds was particularly strong, which does suggest the persistence of private demand for US assets abroad.  Private investors tend to buy corporate bonds and equities; central banks tend to buy Treasuries and Agencies -- though that is changing.

What causes me trouble is the split between private and official purchases, and specifically the absence of any official inflows in the May TIC data.

The TIC data has modest net official purchases of long-term bonds ($11.5b in total purchases, mostly Agencies), net official sales of t-bills (down $5.5b) and a fall in other short-term official claims.   The net result: the official sector supposedly took 2.8b out of the US in May.    

I have a hard time believing that.  May was a record month for official reserve growth.  China, Russia and Brazil all added to their reserves like crazy.   Those three together combined to add close to $100b to their reserves – and a host of other countries were adding to their reserves too.     That money has to go somewhere.

Suffice to say the large rise in the UK’s Treasury holdings – they rose $33.1b in May – suggests to me that the US data isn’t capturing a lot of official demand. 

Moreover, the Fed’s custodial data doesn’t show a comparable fall off in official demand in May (June is another story).   Between May 3 and May 31st, custodial holdings of Agencies rose by $28.45b (v a rise of $12.8b in the TIC data) and custodial holdings of Treasuries rose by $4.1b (v a fall, if bills are added in, of 10.1b in the TIC data), for a total increase of $32.55b.   Add in the data from the preceding week and the increase is even larger.

What of the country-by-country data?   It also doesn’t make any more sense.   After adjustments are made for valuation effects, China by my calculations added close to $50b to its reserves in May.    Its US holdings increased by a mere $6.85b.  Long-term purchases of $10.07b (all agencies and corporate bonds, likely MBS) were offset by a $3.22b fall in short-term claims.   China was a big net seller of Treasuries – or at least it allowed its total holdings to fall by not reinvesting maturing bonds and bills.  Its long-term Treasury holdings fell by $3.2b, its short-term Treasury holdings fell by close to $3.5b.  (data on long-term purchases here, data on short-term claims is here)

I believe that China is reducing the share of Treasuries in its portfolio.  Korea, incidentally, also shifted from Treasuries to Agencies in a big way in May.   But I don’t believe that China is putting less than 20% of its reserve growth into dollars – which means that there is a lot of Chinese money out there doing something somewhere.

Indeed, the UK’s big purchases of Treasuries even call into question the data showing that China’s holdings of US treasuries are falling.   After the last survey, the UK’s Treasury holdings were revised down in a big way and China’s holdings were revised up in a big way.   I am pretty sure the Bank of England didn’t buy $30b of US treasuries in May.   I think analysis that looks only China's purchases of Treasuries while ignoring Chinese purchases of Agencies is misleading -- and worry about any analysis that assumes that the US data captures all of China's purchases.

Russia added over $30b to its reserves in May.   It did buy $6b of long-term US bonds (more than usual), including $4.1b of Treasuries (also unusual, Russia usually prefers Agencies).   But it reduced its short-term claims on the US by $4.5b (largely by reducing its banks deposits), so its net US holdings only increased by $1.5b. 

Brazil added $15b to its reserves in May ($14.6b to be precise).  In past months, almost all of its reserve growth went into the Treasury market (in April, for example, Brazil added $12.3b to its reserves and bought $10.0b of long-term Treasuries).  But not in May.  Brazil only bought $2.15b of long-term US debt, and only $1.9b Treasuries.  Its short-term claims went up by $3.55b –mostly from a rise in bank deposits.  But the total increase in Brazil’s holdings was only $5.7b.

That does puzzle me a bit.   With Russia and China I know not to trust the TIC data.  I fully expect to see a large upward revision in Russian and Chinese US holdings when the next survey data is released.   But the TIC data has up until now generally matched Brazil’s reserves growth.    So a tiny part of me wonders if Brazil – which has had a very high share of its reserves in dollars – has started to diversify.  Just a thought. 

Indian reserve growth in May was lower than in the other BRICs, but it still added roughly $5b to its reserves (mostly in the last week of May).  It certainly doesn’t seem to have added to its US holdings though.  Its short-term claims on the US fell by $4.7b, with its holdings of t-bills falling by $4.55b.   And its long-term holdings fell by another $0.2b …

Another buyer through London?  Or another country diversifying away from the dollar?  India already had a relatively low dollar share in its reserves, so if it really was diversifying, it likely would need to take the dollar share of its reserves below 50% … 

And just to throw us all a curveball, the TIC data actually showed a fairly substantial increase in the holdings of the Asian oil exporters (think the Gulf).  Their long-term claims rose by $3.85b (including $2.05b worth of Treasury purchases) and their short-term claims rose by $3.45b, for a total increase of $7.3b.   

Talk about strange – the US data now seems to be doing a better job picking up flows from the secretive Gulf than from China …

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