Chinese Stealth Treasury Purchasing Continues

Thursday, January 21st, 2010

This article is a guest post by Tyler Durden, of ZeroHedge.com.

A week ago we speculated that the mysterious “direct auction bidder” may be China, purchasing Treasuries  indirectly though offshore money centers. Yesterday’s Treasury International Capital data confirms that there is something strange happening with China treasury purchasing, and adds more fuel to the speculative fire that China is in fact acquiring Govvies through less than overt pathways.

The TIC data released yesterday showed a surge in Treasury buying, with foreigners purchasing $118.3 billion in Long-Term Securities (Bonds and Bills). As the chart below demonstrates, this was a record monthly purchase amount in the LTM period.

What was strange about this data point, is that European investors accounted for well over half of purchases, at $68.1 billion - also a record monthly amount. Of this, the UK accounted for a whopping $50.6 billion, and France also buying a sizable $11 billion. Accounting for all Bill sales in November, foreigners offloaded $18.9 billion in short-term securities yielding next to nothing, after selling $38.3 billion in October. Furthermore, as we speculated, paydowns added to run from short-dated securities: $134 billion in bills were paid down in October and $8 billion in November. While forigners no longer flock to Bills, their holdings of the low-yielding asset class is still elevated at well over pre-crisis levels:

On this backdrop, China was a purchaser of just $14.9 billion in Notes and Bonds, while at the same time it sold $24.2 billion in Bills, for a net outflow of $9.3 billion. This is confirmed by consolidated holdings data, which saw total Chinese holdings drop to $789.6 billion in November from $798.9 billion in October. China’s aversion to Bills is indicated in the chart below, yet it still has a long way to go before it reaches its 2007-2008 holdings of the short-end. In November China held $109 billion in Bills, down from $133 billion in October, and a peak of over $200 billion in May 2009. As the country’s Bill portfolio matures, we expect an accelerating reduction in China’s holding of Bills, especially if ongoing selling interest does not decline.

We will provide a more in-depth analysis of global fund flows in November later, although we are troubled by some odd revision to October data, particularly as pertains to short-term treasury holdings by the Channel Islands and the Isle of Man, which we are currently trying to reconcile.

Focusing back on China for the moment, among other things the country was a net seller of agency debt for the 17th month in a row, offloading $3.4 billion in the class. China also sold $146 million in corporate debt while buying $393 million in US corporate stocks: a token amount on both sides.

Yet what is most odd about China, as we pointed out previously when discussing Chinese FX reserves, is that while China grew its reserves by $55.7 billion in October and $60.5 billion in November, over the same period, it saw its net holdings of US debt decline by 9.3 billion: a $126 billion differential.

As has been widely speculated, China could simply be diversifying away from the dollar, although a $126 billion net purchasing of a UST alternative would likely have had much bigger repercussions on commodity prices globally in the October-November time period. Yet, as Market News points out, this fact does not explain the stability of the CNY, coupled with the ongoing positive trade surplus. Market News’ explanation:

First, it is possible that China is making purchases through other financial centers. The UK’s holdings of US Treasuries rose USD47.4bn in November, and Hong Kong’s holdings also ticked up. If a portion of those holdings can be attributed to China, that would explain part of the disparity between strong FX reserve growth and weak growth in Treasury holdings.

Second, Federal Reserve custodial data, which has a different coverage to the TIC data, shows a solid increase in US Treasuries held in custody for foreign official institutions in October and another smaller increase in November.

Zero Hedge will analyze Fed custodial account data shortly, to determine the nature of the noted discrepancies. Yet the original question does stand: if indeed China is accumulating Treasuries in a covert fashion that bypasses a “smoking gun” appearance on TIC data, why is it doing so? Who stands to benefit from this kind of indirect purchasing via “direct bidders”? The explanation that public and private bidders originating from the UK are accumulating US debt deserves much greater scrutiny: the buyer is certainly not the BOE, which has had its hands full monetizing its own gilts for the past several months (and yes, unlike the Fed, the BOE has no problems admitting it is directly monetizing). And Europe in general is now a funding basket case, exemplified by the events in Greece: the last thing European Central Banks will worry about is funding the U.S. exploding budget deficit when they have a ticking time bomb in their own back yard. So whether the U.K. is merely a hub for offshore purchases of US bonds, whether originating from China or Petrodollar countries, is unknown. If the buyer indeed is China, we raise the same question we did a week ago:

The Fed has now informally offloaded the Treasury portion of Quantitative Easing to China, which does so via the elusive Direct Bid. It also explains why the Fed has generically been much less worried about TSY purchases under Q.E. (a mere $300 billion out of a total $1.7 trillion in monetization). It does beg the question of just how much Chinese holdings of US Debt truly are, as this number is likely hundreds of billions higher than the disclosed $799 billion.

If true, this would imply that the UK “holdings” of $278 billion are highly suspect, as the country likely own a fraction of this total, with the balance held by Chinese and Petrodollar interests.

One thing is certain: if someone is trying to hide their purchases, this is never indicative of a good thing, and much more analysis must be performed to determine just why international fund flows need to be below the radar.

Tags: 1 Billion, asset class, Auction Bidder, Aversion, Backdrop, China, Commodities, Consolidated Holdings, Crisis Levels, Emerging Markets, European Investors, Flock, Foreigners, Money Centers, Offshore Money, Outflow, Pathways, Purchaser, Stealth, Tic, Treasuries, Treasury International Capital, Tyler Durden
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A Yen for Canada?

Monday, January 18th, 2010

Back in September I wrote Canada on the Cusp of Something Big outlining my case about the Canadian economy, markets, and loonie. My central argument then, and now, was that Canadians need to get in front of the “invest in Canada,” theme before foreigners do. Sound fiscal policy, strong, well capitalized banks, a productive commodity complex, and our good-old-fashioned brand of conservatism, continue to make Canada the leading destination for investors, both on the domestic front, and internationally, in the G7.

There is more to the Canada story than meets the eye. The fundamentals, are only half the story, and relevant, particularly for the longer term outlook . What matters equally in the near and long term, however, is what is going on behind the scenes in the proprietary institutional and hedge fund trading rooms.

Read the whole article here.

Pierre Daillie (AdvisorAnalyst.com), GlobeAdvisor.com, January 18, 2009

Tags: Advertisement, Banks, Canada, Canada Story, Canadian Economy, Canadians, Central Argument, Commodities, Commodity, Conservatism, Cusp, Foreigners, G7, Globeadvisor, Half The Story, Hedge Fund, Investors, Sound Fiscal Policy, Term Outlook, Yen
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Niall Ferguson: US on a Collision Course with China

Tuesday, October 20th, 2009

Excellent interview with Niall Ferguson on Yahoo Tech Ticker this week.

Niall Ferguson, Part 1:

“People have predicted the end of America in the past and been wrong,” Ferguson concedes. “But let’s face it: If you’re trying to borrow $9 trillion to save your financial system…and already half your public debt held by foreigners, it’s not really the conduct of rising empires, is it?”

Niall Ferguson, Part 2

Ferguson dismisses the dollar loyalists, citing the British pound – the last international reserve currency - as his example. “These things don’t last forever” but don’t expect it to happen overnight. “It’s a long multi-decade process,” he states…

Niall Ferguson, Part 3

“People have predicted the end of America in the past and been wrong,” Ferguson concedes. “But let’s face it: If you’re trying to borrow $9 trillion to save your financial system…and already half your public debt held by foreigners, it’s not really the conduct of rising empires, is it?”

…

“When China’s economy is equal in size to that of the U.S., which could come as early as 2027…it means China becomes not only a major economic competitor - it’s that already, it then becomes a diplomatic competitor and a military competitor,” the history professor declares.

Tags: British Pound, China, China Economy, China S Economy, Collision Course, Decade, Dollar, Economic Competitor, Emerging Markets, Foreigners, History Professor, Loyalists, Niall Ferguson, People, Public Debt, Reserve Currency, Ticker, Trillion, Yahoo, Yahoo Tech
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Rebecca Wilder’s economic updates (May 14–21): still bad, but flood of shocking reports ebbs

Sunday, May 24th, 2009

This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.

This week was a little light on global data. Given that the trade data is looking “better” in some areas (which really means not falling as quickly in some cases, see this post and this post), it is likely that Q1 will be the worse quarter for many Asian economies who rely heavily on exports for growth. It’s bad, though, with Japan, Taiwan, and Singapore all falling 9% or more over the year! Inflation is slowing substantially in some areas, negative in others. And finally, it looks like US capital markets got a small bump in March, as foreigners returned to risk. Overall, the global economic reports remain in the red, but the shockingly bad reports are fading.

GDP in Asia: waiting to exhale

The chart illustrates annual GDP growth through Q1 2009 for Hong Kong, Japan, Taiwan, Indonesia, and Singapore. Looks bad, but Indonesia is showing some resilience, although GDP is now growing at its slowest pace since January 2004.

More scary inflation charts: disinflationary pressures strong - deflation in some

The chart illustrates annual inflation across key economies through April 2009. The UK is an interesting case: the British pound has been taking a beating and pressuring prices, and the consumer price index is holding on (can’t say the same for the retail price index) better than in other economies (US inflation now negative for two consecutive months). Today, though, S&P downgraded the UK outlook to negative, and the sterling took a hit; wonder what that will do to prices?

Amid a calm developing in capital markets, foreign investors returning to US-denominated risk

The chart illustrates the 12-month rolling sum of net capital inflows through March 2009, as reported by the Treasury International Capital data (TIC). Good thing for the Treasury, which is planning on running $trillion deficits in coming years, that foreigners might buy their notes. In March, foreigners showed a slight shift toward risk, with net long-term flows growing for the first time over the year since the end of 2008 (second time over the month).

Source: Rebecca Wilder, News N Economics, May 21, 2009.

Tags: Asian Economies, Capital Inflows, Capital Markets, Consumer Price Index, Deflation, Economic Reports, Economic Updates, Foreign Investors, Foreigners, GDP, GDP Growth, Global Data, inflation, Japan Taiwan, Resilience, Retail Price Index, Shocking Reports, Treasury International Capital, Trillion Deficits, Waiting To Exhale
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Tony Boeckh: Life After the G20 Meeting

Tuesday, April 14th, 2009

Tony Boeckh postulates on how the global economy is changing in the midst of the credit crisis, and following the outcome of last week’s G20 meeting in London.

Here is an excerpt from this informative and enlightening paper:

“The underlying cause of the credit meltdown and near-collapse of the global banking system was the deeply flawed international monetary system. This enabled the US to run large and persistent current account deficits since the mid-1980s (Chart 1). This in turn allowed credit at US financial institutions to expand at a pace which was not only unsustainable, but put many millions of families and firms in totally untenable debt servicing situations (Chart 2 - next page). They spent substantially beyond their means over many, many years, which is the counterpart of the collapse in US savings.”

This dynamic has left the US, as a country, massively over-indebted to foreigners who have acquired a huge net claim on the US, which represents the foreign financing of US overspendng.

So, we are left with US residents over-indebted to their financial institutions and the US, as a country, over-indebted to foreigners. While the former - US borrowers and lenders - are being bailed out on a grand scale, the debt to foreigners is another matter entirely. In particular, as Chart 1 also shows, the cumulative US current account deficit since the mid-1980’s, now totals $7.5 trillion and is climbing at the rate of $700 billion per year, down from $800 billion recently.

Without going into complications, there are a variety of capital flows into and out of…

Read this whole paper by Tony Boeckh, Boeckh Investments, HERE.

Boeckh is right at home in the global credit markets. From 1968 to 2002, he was chairman, chief executive and editor-in-chief of Montreal-based BCA Publications, publisher of, among others, the highly regarded Bank Credit Analyst, a monthly big-picture analysis of the U.S. economy and financial markets. BCA is now owned by Euromoney.

He was also chairman of Greydanus, Boeckh and Associates from 1985-99, a fixed-income investment firm which managed $2-billion in assets when it was sold to Toronto-Dominion Bank in December, 1999.

With a PhD in finance and economics from The Wharton School, University of Pennsylvania, Mr. Boeckh has taught economics at McGill University and is a founding trustee of the Fraser Institute. [Financial Post]

Tags: Account Deficits, Bank Credit Analyst, Banking System, Boeckh, Canada, Capital Flows, Counterpart, Credit Crisis, Credit Markets, Current Account Deficit, Financial Institutions, Financial Markets, Fixed Income Investment, Foreigners, Fraser Institute, Global Banking, Global Credit, Global Economy, International Monetary System, Investment Firm, Mcgill University, Meltdown, Mid 1980s, Phd In Finance, Postulates, Right At Home, Toronto Dominion Bank, Wharton School University Of Pennsylvania
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Treasury Bills - Is This The Low?

Tuesday, January 13th, 2009

This post is a guest contribution by Bennet Sedacca*, President of Atlantic Advisors Asset Management

In the chart below, please note the very simple channel in long bond futures going back to the beginning of the bull market. Prices seem to top every 5 years and, right on schedule, they’ve topped again.

Click here or on the chart below for a larger image.

The usual correction is in the 18-25% range if it revisits the lower end of the channel. From the top, at roughly 142, a 25% move would be to 106 or so, which is still a whopping 4.4%. I think is far too low considering a) what actually now sits in the Treasury and b) the sheer amount of global supply that is forthcoming. Even in a slow economy, I think foreigners will need to be sellers. I am finishing up my Mortgage Backed Securities program today and heading to more cash.

One more thing. The secular bull market in stocks, in my opinion, ran from 1974 to 2000. Twenty-six years. The bull market in bonds looks like it ran from 1982-2008, also twenty-six years and exactly the length of time I have been at this. With the “blow-off” move we just had, my guess is that the top is in, perhaps for a very long time … like a decade.

Using a Fibonacci analysis leads us to targets that are … well, nauseating and could be a 50% retracement of the whole move. So buyers of long bonds beware. And if you want to refinance, and can actually find a good program, I wouldn’t hesitate. That goes for individuals and corporations alike. Why the Treasury is BUYING bonds at these levels instead of selling long Treasuries is beyond me.

Click here or on the chart below for a larger image.

* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. In 1997 he formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions.

Tags: Asset Management, Bond Futures, Buying Bonds, Fibonacci Analysis, Fixed Income, Foreigners, Global Supply, Income Securities, Industry Experience, Investment Banks, Length Of Time, Mortgage Backed Securities, Portfolio Management, Retracement, Secular Bull Market, Securities Industry, Slow Economy, Treasuries, Treasury Bills, Treasury Bonds
Posted in Bonds, Economy, Markets | No Comments »