Foreign governments are finally slowing down their purchases of US treasuries, but it’s OK because banks are well-known to be putting their money into treasuries, rather than loans.
That’s what the chart below shows.
But as David Goldman brilliantly explains, it also means the Federal Reserve has backed itself into a corner:
Most of this reflects use of the carry trade by foreign banks, or hedge funds, who are doing exactly what the American banks are doing: borrowing at 0.25% from central banks and lending it back to the US government at 1% or 2%, depending how far out the curve they go. The demand isn’t not coming from the oil exporters, who appear to be net sellers. On a geographic basis, the main buyers are “United Kingdom” and the “Caribbean,” that is, banks and hedge funds.
Raise rates and the carry trade comes crashing down. And so does the Treasury market and the mortgage market and the US economy. The Fed is stuck with loose money just as the Bank of Japan was during the 1990s, and for the same reasons.
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