Say what you want about US economic decline, yawning fiscal deficits and flailing stock and property markets. Foreign investors still want a piece of it – or more than a piece, judging by the FT’s report on Wednesday about the surprising surge of foreign money into the US in December.
It’s not as straightforward as meets the eye, however, as China – one of the biggest buyers of US securities – has been quietly rejigging its portfolio, selling off some shorter-term holdings for overall net sales in December. While it was the first decline in Beijing’s US securities investments since February 2008, China nevertheless lifted its purchases of long-term US Treasuries – leading, perhaps, to the extraordinary outburst last week by a senior Chinese official about Beijing’s reluctant determination to keep buying US Treasuries.
The upswing in foreign demand for certain US financial assets is highlighted in the latest monthly Treasury International Capital (Tic) data, which show that foreign purchases of US securities grew to $74bn in December, up from $61.3bn the month before. Inflows for purchases of long-term securities were $34.8bn, compared with outflows of $25.6bn in November.
And that was just in December. Since the Tic data were compiled, we’ve seen the beginnings of what could become a broader capital flight out of Europe – both eastern and western – into the dollar and US bonds. As the FT noted, rattled investors started with eastern Europe and this week, nervousness hit relevant western European banks with comparatively high exposures to eastern Europe.
Well before then, however, December also marked a rebound for sales of long-term US Treasury debt, which saw foreigners buy $15bn worth – a huge turnround considering they sold off $25.8bn of it the month before. And the buying was led by …. China and Japan. China’s holdings of US Treasuries alone grew by $14.3bn to $696.2bn, while Japan purchased $800m in US Treasuries, bringing its holdings to $578.3bn.
We’ve mentioned last week’s outburst by Luo Ping, of the China Banking Regulatory Commission, as reported by the FT. But it was too good not to take this opportunity to refresh your memory:
Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York that China would continue to buy Treasuries in spite of its misgivings about US finances.
“Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”
Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”
However, as mentioned above, China has been carrying out some nifty financial footwork, as highlighted by Rachel Ziemba, on Brad Setser’s FollowtheMoney blog on Wednesday:
As usual my eyes always stray to the role that China and oil exporters play in financing the US so its worth noting that Chinese reduction in short-term holdings meant that it had net sales of $8b in US assets during the month, the first decline since February 2008. While most of the trends that having been playing out since September persist (increasing role of private American investors, reduced role of several central banks given reserve accumulation slowing or reversal) there are some differences including a renewed appetite for US corporate bonds and a slower pace in the demand for T-bills.
Foreign investors continue to be wary of US long-term assets, especially agency bonds. They (especially foreign central banks) have been net sellers of agency bonds since Fannie and Freddie’s solvency was called into question last year and December marked no change with net sales of $37bn. Foreign investors did buy more treasury bonds but continued to make only anemic purchases of US stocks.
Beyond Treasuries, the sudden revival in demand for US corporate debt is particularly striking, as purchases in December reached $41bn after months of selling, according to the Tic report. Not only that, foreign investors were “bottom-fishing” in the corporate bond sector, as Alan Ruskin, strategist at RBS Greenwich Capital, told the FT.
Ziemba notes: This new appetite for corporate bonds may reflect some attempted arbitrage using the bonds and the CDS. My colleague Elisa Parisi-Capone earlier highlighted this trend noting that with cash bond spreads above their respective CDS indices in both the investment grade and high-yield markets (negative basis) several Investment grade bonds look cheap and investors might buy both a bond and credit protection to lock in a risk-free yield – with only counterparty risk remaining — not insignificant in some cases as credit quality is deteriorating.
Meanwhile, foreign investors spurned debt from companies backed by government agencies. Sales of debt issued by agency-backed companies such as Fannie Mae and Freddie Mac totalled $37.5bn in December. “A lot of things are being guaranteed by the government and the yield differential is considerable,” Joshua Shapiro, chief US economist at MFR, told the FT, referring to the flight from agency debt to corporate bonds.
Overall, concludes the FT, the December inflows “beat economists’ expectations and gave some reassurance that the US has sufficient cash flows to continue financing its trade deficit”.
That, surely, is just the kind of “reassurance” Japan and China need – to know their investments in US securities could go toward the fine cause of financing US purchases of their exports. There is, afterall, a very thin line between love, hate and mutual need.
Related links:
US Treasury Tic data for December – US Treasury
Foreign money continues to pour into US – FT
On the December Tic data – FollowtheMoney
China to stick with US bonds – FT
China to US: We hate you – FT Alphaville