Wednesday, March 18, 2009
foreign demand for t-bonds wanes
What have foreign investors been buying? Short-term Treasury bills. In huge quantities. ... However, that surge in demand for bills now seems to be fading.
The fall off in total TIC flows in January reflected private bill sales. The official sector is still buying — $100 billion in bill purchases over the last 3 months of data only seems small relative to the post Lehman peak. But with global reserve growth slowing (even China doesn’t currently seem to be adding to its reserves), central banks won’t be as large a source of demand for Treasuries going forward as they have been in the past.
That means a fall off in central bank demand for Treasuries wouldn’t necessarily be a sign that central banks have lost confidence in the US Treasury market. It could equally be a sign that a lot of central banks no longer have any new funds to invest.
again, the contraction in global trade volumes is rapidly downsizing both export and import volumes, with the net effect of a smaller trade deficit for the united states and smaller surpluses (even moves to deficit) elsewhere. this should not be a surprise, nor should it be surprising if it continues.
And if — as seems likely — foreign demand for Treasuries fades long before the US fiscal deficit, the US Treasury will need to sell an awful lot of Treasuries to American investors. For the past several years I have argued that it was almost impossible to overstate the impact of central bank demand on the Treasury market.
That may no longer be the case going forward.
The world is changing. Global reserves aren’t growing. The echo from their past peak that we observe in the current Treasury data will fade.