Follow the bouncing ball
Today, let's follow the bouncing ball:
Exhibit 1: foreigners liked US corporate debt in June. They really liked it.
International investors bought a net $71.2 billion Treasury notes, corporate bonds and other securities, compared with $55.8 billion in the previous month. The report reinforced speculation rising interest rates in the U.S. compared with Europe and Japan are increasing demand for dollar-denominated assets.Of the net $79.1bn in domestic securities purchased by foreigners in June, 66% were corporate bonds while just 18% were US treasuries (and 0.1% were equities!).
``This is a large enough number to be a positive surprise,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York. ``We're not only adequately financing our trade deficit, but even a bit more than that. It certainly helps us understand better why the dollar continued on firm footing in June.''
Exhibit 2: nominal interest rates on US corporate debt in June were low. Extremely low. The average yield on Aaa rated corporate bonds was 4.96%, the lowest level since 1966. On Baa bonds the yield was 5.86%, the second-lowest level since 1967.
Exhibit 3: interest rates are falling or are stable nearly everywhere except the United States. So the best buy continues to be the US despite our low returns. As Bloomberg notes,
The yield difference between U.S. 10-year Treasuries and German bunds with similar maturities is 99 basis points, or 0.99 percentage point. The gap, or spread, reached a five-year high of 104 basis points on July 29.Exhibit 4: In turn, the dollar is rising. The real broad dollar in June was up nearly 4% over December 2004. Per the real major currencies index, the dollar was up 7.4%. The greenback was even stronger in July and is rising further on the news mentioned in Exhibit 1.
Conclusion 1: The Fed doesn't need to raise rates much further to keep foreigners interested in US debt or keep the dollar up. In fact, higher interest rates are likely to only strengthen the dollar.
Conclusion 2: With a strong dollar and relatively low real interest rates, the US will keep importing like a mad man. What, me save? Popular convention wisdom these days seems to be relying on an end to housing price inflation to produce a renewed interest in personal savings. Yet the US personal savings rate has been plummeting since the mid-1980s. It is going to take the equivalent of moving heaven and earth to get Americans to start saving more than 1-2% of their income.
Conclusion 3: Global imbalances will only grow more and more acute over the rest of 2005.
Conclusion 4: In 2005Q1 the US current account deficit as a percentage of GDP was -6.4%. CA balance of -7% of GDP, here we come!