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.

Monday, April 16, 2007

Contradictions Between the Treasury and the Fed Data

According to the Fed's H41 statements, Marketable securities held in custody for foreign official and international accounts went from $1.176156 Trillion on 1/31/2007 to 1.205004 Trillion on 2/28/2007, showing an increase of about $29 Billion for the month of February. Meanwhile, the Major Foreign Holders portion of the TIC data released by the Treasury Department today shows Foreign Official accounts only increasing by about $3 billion to $1.451.3 trillion. Estimating January's custodial additions as $17 billion contrasts against the Treasury's reported official subtraction of $3.6 billion.

First I have to say I think that the treasury data is the less reliable of the two and subject to large revisions like the one that usually occurs in June. Also, since the Treasury data has been higher than the Fed data going back as far as this source of historical Treasury MFH data goes.

If we assume that both data sets are reasonably accurate then one of these appears to be a likely explanation:
1. Official foreign accounts at the Fed were big net buyers while official accounts not at the Fed were big net sellers.
2. Non-official international accounts at the Fed were especially big buyers.
3. Both of the above.

Who is buying remains the big question, and I can only find clues, not answers. Total foreign holdings rose $24.3 billion, so non-official investors were likely buying. As a whole, Japan's estimated holdings dropped by $10 billion in February, calling into question my thought that it could be the Bank of Japan intervening as the did in 2003-2004. The total decline was probably down closer to $12 billion because Japan's June series revision was down $21.5 billion. Year over year Japan is down $38.6 billion. China, meanwhile was up $16.3 billion in Feb, had a +$44.3 billion revision in June and is up $97.8 billion year over year. Chinese and Japanese official accounts could be the culprit, if China was buying through the Fed and Japan was selling outside the Fed. However, evidence below suggests that China may not be buying primarily through the Fed.

I've seen the conspiracy theory floated around that the Fed is using secret offshore accounts to buy up US treasuries. IF these accounts actually exist and are included in the non-official international accounts data then they could also explain the big disconnect between TIC and H41 numbers. However, that conspiracy theory has been around for more than a year and prior to the last two months Treasury data was rising faster than Fed data.

The June series revision is the result of a survey sent to institutional bond holders to find out what countries they were really holding securities for. The UK always sees a huge downward revision because it is a major financial center holding bonds for investors from all over the world. Last June UK holdings dipped by $155.6 billion on the revision. Japan also dipped substantially (by $21.5 billion). The biggest gainers were Foreign Official, China and (by default) the United States. Foreign Official and the US both rose by around $120 billion, while China added $24.3 billion. China probably made up a significant chunk of the Foreign Official additions. US institutional investors, and especially hedge funds, probably made up most of the share of treasuries that were being held abroad for US investors.

Still more questions than answers. All comments and theories are welcome.

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