Wednesday, December 15, 2004

Has East Asia finally had its fill?

That is one possible interpretation of the Treasury Department's release of the October international capital data. For the month, total net US securities purchased was down $1.4bn; private purchases changed -$2.6bn while official purchases changed +$1.2bn.

But that's not what piqued the General's interest this morning. What made me really sit up and take notice was the data on major foreign holders of US securities -- both private and official -- broken down by country. Japanese holdings of US securities has fallen two consecutive months now. From a high of $722.2bn in August, the total is down 1.0% to $715.2bn in October. The blistering pace of Chinese purchases has slacked off noticeably. While not net selling, China added only $0.3bn to its holdings in October, a mere one-tenth of its average pace of the first seven months of the year. Taiwan added just $0.1bn in October and is still below its June 2004 high, and Korea net sold $0.9bn on the month.

This must be balanced against the data which separates private from official purchases (which is unfortunately not broken down by country), which showed America's sugar daddies -- foreign central banks -- continue to shower gifts on their favorite girl. Official purchases of US treasuries rose a hefty $5.0bn in October to a monthly total of $14.2bn. Private capital reduced its purchases of US treasuries down to just $3.5bn. Over the last 12 months, central banks have bought 55% of US debt. In 2003 the figure was 39%, and in 2002 only 6%.

The US is relying on central banks for purchases of other securities as well. The very suspicious ebbs and flows of private sector data suggests as much. Brad Setser among other thought the record $42.7bn private purchase of US corporate bonds in September was masking a lot of central bank activity, and the big fall down to a below normal $18.3bn lends credence. Even more funny is the data on agency bonds. Private agency bond purchases rose from just $6.1bn in September to $22.8bn in October -- the second highest level in 17 months -- while official agency bond purchases actually fell for only the second time in the last 15 months.

Let's sum up. What do foreigners want from the US?

In the pole position is -- you guessed it -- federal debt. Over the last three months of data (August-October) foreign central banks and private capital have bought net $48.5bn in US treasuries. Central banks have purchased a stunning 83% of this debt.

Number 2 is the American housing stock. Over the last three months of data foreign capital and central banks have bought net $47.6bn in agency bonds. No wonder mortgage rates are staying so low!

A close third is corporate bonds at $47.5bn over August-October. A very distant fourth is equities, which in this period were still being net sold, changed -$0.4bn.

In relative terms, US treasuries and agency bonds purchases have seen the biggest growth. Comparing the 12 months ending October 2003 to the 12 months ending October 2004, growth in foreign purchases of US treasuries is $129bn; in agency bonds, $50.9bn; in corporate bonds, $36.7bn; in equities, $0.1bn.

The massive interest rate subsidies to the US continue, but for how long? Perhaps the November data will show a big spike in East Asian purchases to arrest the dollar's decline. The early fall data suggests that our sugar daddies may be getting tired of all these expensive gifts after all.

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