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Friday, March 29, 2024

Foreign Fund Flows Analysis Per Most Recent TIC Data

Courtesy of Tyler Durden

We present a detailed analysis of international capital flows as disclosed by yesterday’s most recent TIC data. Among the key observations we note that while foreign buying of Long Term Treasuries came at a healthy $61.4 billion in total net long-term treasuries, this was coupled by record selling of corporate debt, to the tune of ($24.6) billion. January also saw a net sale of over $5 billion in agency securities, offset by $4.3 billion in stock purchases.

Note the record sales of corporate bonds in January.

Over the last twelve months foreigners have bought $589 billion in LT USTs, have bought $154 billion stocks, and have sold $58 billion in Corporate Bonds, and $2 billion in Agencies.

Focusing on the big 3, and especially China, we can see that China sold a total of $5.9 billion in USTs, which consisted of a sale of $12.1 billion in Bills offset by a purchases of $6.3 billion in Long Term USTs (Notes and Bonds).

Looking at China’s cumulative holdings split by ST and LT USTs, it is obvious that China has been rolling out of its Bill holdings, which peaked at $210 billion in May 2009, and are now down to just $58 billion, even as it has been increasing its LT holdings. The pre-crisis Bill holdings for China averaged in the mid 20’s range, meaning that China will likely roll another $40 billion from its existing $58 billion position. China’s LT UST holdings were at a record $831 billion in January.

Below is the change in Japan’s ST and LT holdings.

Ostensibly the most interesting foreign holder of Treasuries over the past 6 months has been the UK.The nation’s purchasing of LT USTs surged in November as can be seen on the chart below and has continued at a torrid pace. This parallels precisely the emergence of the Direct Bidder as a crticial component of every treasury auction, leading to the conclusion that Direct bidders are likely based in the UK. Whose bidding they are doing is unknown. It is certainly not that of the UK itself, which until recently has been busy buying its own bonds.

With US interest rates at record lows as we pointed out recently, foreign investor demand has not subsided, indicating that all these purchases are merely a function of massive excess liquidity throughout the world, which however can only be captured by major financial institutions; retail will forever be locked out at borrowing in the short-term credit markets at anything comparable to the 0.25% that banks can do today. Therefore, this data, just like all the stock market data makes it clear that once tightening begins (if ever – we still believe just the transition from a loose to a tight monetary policy will be a major systemic shock), the trade off will be between the increased payoff from higher rates, and the ability to borrow cheap to finance this yet another carry trade. Should central banks stop the spigot, look for some major inversions in the above patterns.

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