Citi’s Todd Elmer makes an interesting observation looking at the latest TIC data .
(TIC stands for Treasury Inflow Capital, and it basically measures foreign investments in U.S. assets.)
There was little market response to the recent release of monthly capital flows data (TIC) by the U.S. Treasury. This may come down to the fact that the monthly flow data can be extremely volatile and the subdued response is consistent with the typical pattern of only ‘outside’ months driving a significant market reaction. With about $58bn in foreign purchases of U.S. long-term securities seen in August, net inflows stand towards the upper end of the historical range, but not so much as to mark a major shift in the trend. Nevertheless, this strong headline inflow belies a worrying trend for USD. Foreign purchases of U.S. assets were entirely concentrated in Treasuries.
Foreigners purchased about $60bn of Treasuries, with a small net outflow seen from U.S. agencies, corporate bonds and stocks, and into foreign stocks and bonds. The apparent lack of foreign appetite for U.S. corporate securities hardly looks exceptional in the context of the recent trend. Since the onset of the global financial crisis almost all buying of U.S. securities has been concentrated in safe-haven assets. With U.S. assets not the assets of choice, USD looks vulnerable to any pullback in this safe-haven buying of Treasuries.
So there’s a massive amount of demand for risk-free U.S. Treasuries, and in a rational world, the government would take advantage of that huge demand and spend more money and issue more debt. But instead that money is just going to the U.S. Treasury, where it doesn’t get spent.
This is the same thing happening in Europe, where German bunds trade at record low yields due to safe-haven flows. The German government, opposed as it is to spending money, isn’t letting that money get recycled into spending and more economic activity. That’s one reason why Richard Koo proposes banning cross-boarder bond sales in Europe, so that saved money gets recycled into spent money.
Bottom line: Demand for German and U.S. bonds is huge. It’s a scandal that money isn’t going anywhere.