FYI | Sep 19 2007
By Greg Peel
For the purpose of this article, all figures are in US dollars.
Given the excitement surrounding the Fed rate cut last night, the July TIC flow data were largely overlooked. It probably doesn’t help much that the US Treasury department always takes two months to compile its Treasury International Capital report. July now seems like an eternity ago.
But the signs were, nevertheless, not good for the US dollar. The figures suggested what many had suspected anyway – that the world has put its money where its mouth has been and had begun reducing US dollar exposure even before all hell broke loose on the credit crunch front in August. The monthly TIC report measures cross-border acquisitions of US securities with maturities of more than one year.
Total inflows amounted to $103.8 billion, up from $34.3 billion in June. While this may look healthy on the surface, the breakdown is more alarming. Most of that money flowed into shorter dates, consistent with the mad rush into 90-day government paper that has occurred as a result of the credit crisis. Counting only longer dated securities, flows into the US amounted to only $19.2 billion, down from $81.8 billion in June. The July trade deficit was $59.2 billion, so without the flow into short dates the deficit would have remained unfunded.
Breaking down the long term category further, US Treasury notes and bonds saw sales of $9.4 billion by foreigners compared to $24.7 billion of purchases in June. This is the first negative month since April 2006, when foreigners sold $3.51 billion.
Foreigners bought $21.2 billion in US equities, down from $28.8 billion, and only $4.2 billion of corporate debt, down from $25.9 billion. This is before credit markets shut down.
Total foreign official (central bank) holdings of US Treasury bills, notes and bonds did increase, but only by $8 billion – from $1.443 trillion to $1.451 trillion. Number one holder Japan reduced its stake from $613.2 billion to $610.9 billion. Number two China edged up from $405.1 billion to $407.8 billion, while number three, the UK, increased from $192.6 billion to $210.1 billion.
The move away from longer dated US securities – representative of faith in a strong US economy – does not bode well for the US dollar. The fall in corporate debt activity is also an ominous sign. It is hard to think the August and September figures will be anything but worse for the corporate market. The Fed’s rate cut may be sorely needed, and perhaps only a first step.
