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 TreasuriesĀ 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.
