According to the Treasury Department’s popular
Treasury International Capital System (TICS)report, official foreign holdings of Treasury securities fell to $US4.009 trillion in June from $US4.072 trillion in May.
So it would seem that the world’s central banks are exiting U.S. securities.
“There are, however, many problems with such an interpretation, and in fact it seems likely that the world’s central banks are increasing their allocations to US assets,” wrote UBS’s Paul Donovan in a brief research note today.
He identifies three issues with TICS, which we paraphrase:
- The data is calculated using market prices, which means the value of holdings are subject to fluctuations in the market. “The weakening of the Treasury market in June will have reduced the figures for bond holdings, without telling us anything about official transactions in Treasuries,” wrote Donovan.
- Foreign currency reserves aren’t held just in government bonds, especially since the 1970s. “In 2013 16% of participants could hold equities, 54% could hold agencies, and a surprising 26% could hold bank debt, to give just three examples of assets that official money has diversified into,” said Donovan citing a proprietary survey of reserve managers. “Focusing too narrowly on bond transactions is to miss the fact that central banks are behaving more like conventional institutional investors. ”
- The TICS data is not comprehensive. According to a 2013 UBS survey, 52% of reserve managers used external managers. “Even though the beneficial owner of the assets is a foreign official institution, that fact can not be captured by the TICS data collection process,” said Donovan. “Instead, the external manager will be recorded as the owner of the assets.” Donovan estimates this miss out on “roughly a fifth of official holdings of U.S. assets.”
“Investors who try to use the TICS data as a guide to currency intervention by emerging market central banks are likely to be misled,” said Donovan.
That’s the gist of Donovan’s note.
But he also has a message for all of us in financial media:
…there is a worry arising from the interpretation of the TICS data. The US Treasury may have been clear about the limitations of the TICS numbers, but the detailed explanations do not appear to have been heard in what might be termed the “economic blogsphere”. The ‘armchair economist’ who offers casual opinion online and via email may be seduced by the data description “foreign official holdings of US Treasuries” into believing that the data does actually show comprehensive foreign official holdings of US Treasuries — when of course it does not. The role of non-expert opinion in financial markets has been growing in recent years. The considerable complexity (and equally considerable gaps in knowledge) that surround the Treasury’s reporting of official holdings of US assets could lead to the dissemination of well intentioned misinformation…
So, sorry for this post — » We Just Witnessed The Largest Sales Of Treasuries By Foreigners In 6 Years
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