from Follow the Money

Strange trade numbers, strange TIC numbers

May 16, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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The trade deficit fell in March. So did the capital flows needed to sustain ongoing trade deficits. Net inflows of $45.7 billion a month are not enough to sustain even $55 billion monthly trade deficits, let alone $60 billion monthly deficits. I guess there was a reason why the euro was sort of strong in mid-March.

Take out the $28.4 b (net) of Treasuries the Caribbean bought in March, and net inflows were even lower -- only $17.3 billion. If US hedge funds domiciled in the Caribbean for tax and other reasons were behind these purchases and they financed their purchases by borrowing from US banks, these purchases did not generate any net financing of the US deficit.

And what to make of net sales of $14.4 billion by official institutions? After all, lots of Asian central banks spent much of March denying any interest in diversifying their reserves.

And to be fair, the Koreans clearly did not diversify -- the value of their stash of Treasuries grew by $4 billion in March (and on a flow basis, they bought $0.1 b of Treasuries). The Taiwanese bought $2.2 billion of Treasuries. The Chinese did not sell -- though their net (recorded) purchases of Treasuries, Agencies and corporate bonds was only $2.3-2.4 billion (Flow data all comes here) -- well below their roughly $17 billion in March reserve accumulation.

So what happened?

Quick answer: Don’t forget about the Norwegians. They sold $17 billion of Treasuries in March. That cut their Treasury holdings in half. Norway’s Oil Fund decided to diversify? They certainly did not just shift from Treasuries into Agencies or corporate debt.

The OPEC countries were not found of Treasuries in March either. Their total holdings fell $5.4 billion -- and since oil was quite high, we can be pretty sure they were not short on cash.

A one off? Presumably so, since Norway is not likely to sell $17 billion of Treasuries every month.

More interesting is the fact that neither China nor Japan were major purchasers of US debt in March, at least according to the US data. China bought $2.4 b, mostly corporate bonds. Japan sold about $0.5 billion, with small Treasury sales offsetting small Agency and Corporate bond purchases. No evidence of the yen carry trade. I wouldn’t make too much of the Chinese data though -- the Chinese almost certainly bought in ways that concealed their tracks. I would be shocked if they put the remainder of their growing reserves into euros in March ...

UPDATE: I have blown my share of calls in the past and I’ll blow more in the future, but every now and again I get something right, even if somewhat inadverantly. In this case, though, it was pure luck: I was relly just searching for a clever headline.Looking at the capital flow data for Q1 as a whole, three things jumped out at me:

1) Recorded inflows from foreign central banks were only $19b in q1. Total recorded purchases of Treasuries were only around $4 billion. That is a big change. I also don’t believe for a second it is the "real" amount of foreign central bank purchases. Adjusted for valuation changes, I estimate the major emerging economies added $120 b to their reserves in q1. Add in the oil exporters in the Middle East, and total reserve accumulation should be in the $145-$150 b range. There is an enormous gap between what we know central banks added to their reserves, and what shows up in the US data. I personally don’t think their purchases of euros, pounds and Aussie dollars explain the entire difference.

2) Private investors abroad remain very interested in the US Treasury market, despite its low yields. Total purchases were around $97 billion in q1. Annualized, that provides about $400 b, enough to finance the entire US fiscal deficit. But most of that demand comes from the Caribbean -- $64 b; another $19-20 b comes from the UK. I wonder if some of the dollars central banks are placing in the international banking system are being lent to the Caribbean hedge funds, providing a non-US based source of funding for these trades ...

3) US investors remain rather interested in buying foreign equities. They bought about $15b in March, and $35b in the first quarter. US purchases of foreign equities exceeded recorded central bank inflows to the US. Outflows from the US make it all the harder to finance our massive current account deficit -- Add in say $150-180 b of portfolio equity outflows and $200-$250 b of FDI outflows, and the US needs to attract about $1200 b in financing from abroad to run a $800b current account deficit.

Plenty to mull over.

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