It’s All About Supply, Not Demand
>
Jim has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors.
~~~
It’s All About Supply, Not Demand
- Barron’s – A Foolish View of America’s Debt
America’s dependence on foreign capital to fund its fiscal and external deficits is anything but a joke. And as the dollar has declined steadily — not just in the past eight months but over the past eight-plus years — global investors’ willingness to continue to acquire and hold dollar assets has been open to question. But the latest Treasury International Capital data show that, notwithstanding growing criticism of American fiscal and monetary policies from abroad, foreign demand for long-term U.S. financial assets remains robust. And that’s after deducting a steady exodus of American investors’ money for foreign securities…While the Post cartoon expresses the popular view of America’s status as debtor, the real question isn’t whether the U.S. will pay back what it’s borrowed from abroad. In essence, can foreign purchases of Treasuries keep up with the widening deficit? That’s the question posed by Greg Blaha and Ryan K. Malo of Bianco Research in a note to clients. Back in September 2007, foreign purchases of Treasuries equaled 270% of new issuance, they note, as they sucked up the available supply of U.S. government securities in sight. That was before the budget deficit exploded last year owing to the economic collapse and the cost of the federal bailouts. By September 2009, foreign investors were taking down only 16% of Treasury issuance. Over the 12 months ended September, China’s net purchases of Treasuries totaled a hefty $101 billion. While that’s a record, “it pales in comparison to the U.S. deficit,” Blaha and Malo observe. China holds nearly $800 billion in Treasuries, but the $1.4 trillion deficit could expand by another $400 billion before abating, they add. Foreign investors are unlikely to absorb that extra supply, they conclude.
Comment
These quotes came from our TIC Update yesterday. Below is a quick recap:
The chart below shows weekly gross issuance of Treasury bills, notes and bonds since 1980. Issuance began to spike higher towards the end of 2007, peaking at $302 billion during the week ending September 26, 2008.
<Click on chart for larger image>
As the next chart shows, this increased issuance has not been met by more demand from foreigners. The blue bars show the monthly net purchases of Treasury securities by All Foreigners as a percentage of that month’s Treasury issuance. The red line shows China’s net purchases of Treasury securities as a percentage of issuance. Note that, in many cases, foreigners would buy more than 100% of all Treasury securities issued throughout the quarter. This series is measuring the monthly TIC number against issuance, not the actual percentage of the Treasury auctions foreigners are buying. Foreigners bought the equivalent of 270% of all Treasury issuance in September 2007, but this measure has since decreased to only 16% as of September 2009.
<Click on chart for larger image>
China’s Treasury purchases, shown below, totaled only totaled $101.11 billion in the year ending September 2009 (red bars, bottom panel). While this is a record annual amount of net purchases, it pales in comparison to the U.S. deficit. Some estimates of the budget deficit call for increases of another $400 billion before any signs of abating, and with China already being the largest holder of U.S. Treasury securities at $798.9 billion, it is highly unlikely they are going to be able to ramp up their Treasury purchases enough to cover this shortfall.
<Click on chart for larger image>
As the budget deficit widens and the U.S. government borrows more, the U.S. taxpayer will likely end up shouldering this burden. While this may not come as a shocking revelation, the sheer size of these numbers might. After comparing the budget deficit to probable increases in Treasury issuance to foreign purchases of bills, notes and bonds, it should be evident that foreigners are unlikely to be able to soak up all the new supply in the pipeline. For those who always hoped for a day in which the U.S. was not at the mercy of foreign purchases of U.S. securities, be careful what you wish for.
Sumner is able to take us from the Flemish forger, Van Meegeren, and his horrendous reproductions of the Dutch painter, Vermeer, to the notion that every recession seems unique and special to its protagonists. So just how did Van Meegeren fool the Nazis with paintings that today look so awful, so un-Vermeer? Jonathan Lopez, the noted art historian, argues that a FAKE succeeds owing to its power to sway the contemporary mind. Or in other words, the best forgeries tend to pay homage to the tastes and prejudices of their time. The present is so seductive.
