Economic Rebalancing

The global economy is horribly out of balance, with the United States going deeper into debt each year as a result of a huge trade gap. This blog describes the process of global economic rebalancing. If you have any comments or questions about the posts here, please don't hesitate to use the comments section.

Wednesday, October 18, 2006

August Treasury International Capital Flows

TIC data for August came out yesterday, showing a remarkable surge in foreign buying of US securities. According to the latest release, Net long term flows were as follows:
May = $67.0 billion
June = $75.5 billion
July = $32.9 billion
August = $116.8 billion

Treasury purchases saw the sharpest rise, but Agencies and corporate bonds also saw big inflows:

The buying was spread across many countries:
Japan added $7.6 billion in August
China added $8.7 billion
Canada added $4.9 billion
Brazil added $11.5 billion
The UK added $11.1 billion, but most of that was purchased for investors from other nations.

The purchases were typical of China, but Japan had not been decreasing holdings for over a year. Canada has doubled its treasury holdings (to $47.2 billion) over the past year, while Brazil's holdings had hovered around $32 billion until the August surge.

With all this August buying going on, the Dollar strengthened against the Yen and held its own against the RMB. As long as the dollar stays strong, US consumers can continue to consume more than they produce. As long as foreign investors are willing to accumulate US assets, the dollar can stay strong.

Russia has one of the largest foreign reserve positions in the world, but it doesn't show up on the list of Major Foreign holders. Their US holdings are unique in that they are overwhelmingly weighted toward short term debt. Asian nations typically hold large long term debt positions in the US, while European nations and Canada are more balanced between Equities and Long Term Debt.

Japanese treasury purchases could likely be related to the Yen carry trade and are subject to reversal if the speculative climate changes. Russia recently announced that they'll be accumulating Yen reserves, which most countries have shied away from because of low interest rates. The bulk of this is supposed to take place in 2007. Such a move could result in the purchase of tens of billions of dollars worth of Yen, putting pressure on Yen carry traders. I wouldn't expect much of a move before 2007, as hedge fund managers are likely to defend their 2006 gains (and bonus checks) vigorously during the final months of the year.

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