from Follow the Money

Another month, another $100b plus in debt exports …

October 17, 2006

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Actually, US exports of debt were down a bit earlier in the summer -- and foreign demand for Treasuries was rather anemic all year.  August though showed the United States continues to top the world at exporting debt.  Foreigners bought $115.2 of US debt -- and $46.4b of Treasuries.   

Strong foreign demand for Treasuries in August wasn't a real surprise, given the rally in the Treasury market.  A lot of central banks were supposedly on the sidelines earlier this year, waiting for the Fed to end its rate hiking cycle.    They got back into the game -- big time -- in August.  I guess they wanted to try to lock in (comparatively) high rates.  Central banks bought $17.4b of Treasuries, and some of the $29.0b in "private" purchases could have come from the custodial accounts of official actors in the Middle East.  

Foreigners continue to shy away from US equities.  They only bought $4.4b in August.   But that isn't much of a surprise. 

The surprise in the data, to the extent that there was one, was the quite weak US demand for foreign securities.  US residents seem to have been net sellers of foreign equities in August.  That is a bit of a change. 

A bit on the bilateral data.

Russia short-term claims on the US fell by $15.8b in August, mostly from a fall in the Bank of Russia's custodial holdings (think short-term Agencies).   A tiny bit of that was used to buy long-term US debt -- net Russian purchases of Treasuries and Agencies topped $1.9b.   But the overwhelming majority was used to paydown Russia's debt to the Paris Club.   Russia had not achieved its targetted dollar/ euro/ pound split before making this payment, it almost certain did after making its payment.   Russia has traditionally kept most of its reserves in relatively short-term accounts.  And right now, the gap between Russia's recorded short-term holdings ($73.7b) and its reserves (roughly $260b at the end of August) has never been bigger.

China, though, is going in the other direction.  Big time.  Its short-term claims on the US increased by $11.5b in August, and the PBoC accounted for $11.3b of that increase (including $3.9b in short-term Treasuries).   With its short-term balances rising so fast, you might think that China would have scaled back its purchases of long-term US debt.  But it didn't.  It bought $12.1b in long-term debt -- $4.85b in Treasuries, $4.95b in Agencies and $2.3b of corporate debt.   And to top it off, China bought $1.2b of foreign debt (probably dollar denominated emerging market bonds or bonds issued by the World Bank) from American investors.  

Sum up China's growing short-term and long-term claims, and China provided $8.75b of financing to the US treasury, and $23.6b in total financing to the US.   Not bad work for a slow month in the middle of the summer.

The $23.6b rise in China's recorded claims on the US in August trumped the $17.5b reported increase in its reserves -- that hasn't happened for a long-time.  We know that most of the growth in Chinese short-term claims came from the PBoC.   We don't formally know who in China bought US long-term debt, though it is reasonable to think that most of the purchases typically come from the PBoC as well.  

But the very strong increase in Chinese purchases of US debt only adds to my suspicions about China's relative low reported pace of reserve growth in q3.