US: Treasury International Capital

Thu Feb 15 15:00:00 CST 2018

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Foreign Demand for Long-Term U.S. Securities $27.3B $57.5B

Foreign accounts were once again big buyers of U.S. long-term securities in December, at $34.3 billion and well above the $7.0 billion in net buying of foreign securities by U.S accounts. The difference is a headline $27.3 billion in net inflow vs an unrevised and strong $57.5 billion in November.

Foreign demand for equities was very pronounced going into year-end, at $35.0 billion in December vs $12.6 billion, $12.3 billion and $26.2 billion in the three prior months. Foreign accounts are usually strong buyers of U.S. Treasuries but not for the last several reports with December coming in at net foreign selling of $16.0 billion. But U.S. agency bonds were demand, up $16.4 billion, with corporate bonds down $1.3 billion.

U.S. accounts were buyers of foreign equities, at $8.3 billion, and sellers of foreign bonds at $1.4 billion. Looking at foreign ownership of Treasuries shows China increasing their holdings by $8.3 billion to $1.18 trillion and Japan cutting theirs by $22.6 billion to $1.06 trillion.

It will be interesting to see how foreign investors responded to the market gyrations in January and whether they cut their holdings in U.S. equities and whether their demand for Treasuries improved. But going into the new year, foreign buyers were active participants in the stock market rally. Note that financial inflows help offset the nation's large trade gap and rising government deficit.

These Treasury data track the flows of financial instruments into and out of the United States. Instruments tracked include Treasury securities, agency securities, corporate bonds, and corporate equities.

TIC data have been issued for the past 30 years, but only recently, due to an enormous rise in foreign participation in our markets, have they grabbed the attention of the international financial markets. Although methodologically limited, TIC offers a measure of foreign demand for our debt and assets. Bonds and the dollar are most sensitive to the data, therefore bond and foreign exchange markets are more likely to react to this report than the equity market. Strong inflows (demand for U.S. securities) are needed to keep downward pressure on interest rates. Strong inflows also underpin the value of the dollar since foreigners must purchase dollars in order to buy our securities. A strong dollar helps to maintain stability in all U.S. financial markets. Since foreign ownership of U.S. equities is comparatively small, the equity market is less concerned about this report.