Today’s TIC report shows foreign investors increased holdings of U.S. Treasuries by a net $34.6 billion in May which accounted for the bulk of $35.5 billion total net monthly inflow of all capital.
It is of little surprise then to learn that there was a net inflow into Treasuries from foreign private investors of $5.3 billion. Foreign central banks had an even larger appetite for U.S. government bonds as they purchased a net $19.7 billion of Treasuries in May. That is the largest monthly inflow from foreign official buyers in the past 12 months.
As the middle chart shows, the net foreign purchases of U.S. Treasury securities are not nearly as strong as they were in the immediate wake of the global recession or even at the height of the European sovereign debt crisis a few years ago.
Still, compared to the diminished foreign appetite in 2013, it appears that U.S. Treasuries are regaining favor. In the past four months, the net purchases of Treasuries by central banks have increased $16.8 billion per month on average. That is more than enough to offset the decrease in purchases attributable to Fed tapering and might offer one reason why the 10-year Treasury yield was as low as 2.40 percent in May.
While Treasury bonds and notes remain popular overseas, foreigners were net sellers of U.S. corporate bonds and short-dated government bonds like T-bills. Capital flows into other assets like agency bonds and equities were also modestly positive, but the real driver of TIC flows in May was Treasuries.
U.S. residents were still net buyers of foreign securities in May, but the $15.2 billion dollar net outflow is the smallest we have seen in the past three months.
Times like These Are Made for Taster’s Choice
In terms of geopolitical risk, there was no shortage of nerve-rattling events for foreign investors in May. Pro-Russian militants seized offices and police headquarters in eastern Ukrainian cities. Rebels in Syria withdrew from the besieged city of Homs. The army in Thailand declared martial law after months of political unrest. Militants began to gain ground against the government in Iraq. While this is far from a complete list it does establish the notion that investors might be seeking safe harbor from the storm.It is of little surprise then to learn that there was a net inflow into Treasuries from foreign private investors of $5.3 billion. Foreign central banks had an even larger appetite for U.S. government bonds as they purchased a net $19.7 billion of Treasuries in May. That is the largest monthly inflow from foreign official buyers in the past 12 months.
Taper Offset?
At the end of 2013, there was a broad consensus that interest rates were headed higher. The general narrative offered was that as the Fed gradually dialed back it purchases of Treasuries and mortgage-backed securities, there would be fewer buyers for these securities. With more sellers than buyers, the price would fall and yields, which move inversely to price, would gradually rise. That is not how it played out, to the great frustration of many forecasters and bond fund managers.As the middle chart shows, the net foreign purchases of U.S. Treasury securities are not nearly as strong as they were in the immediate wake of the global recession or even at the height of the European sovereign debt crisis a few years ago.
Still, compared to the diminished foreign appetite in 2013, it appears that U.S. Treasuries are regaining favor. In the past four months, the net purchases of Treasuries by central banks have increased $16.8 billion per month on average. That is more than enough to offset the decrease in purchases attributable to Fed tapering and might offer one reason why the 10-year Treasury yield was as low as 2.40 percent in May.
While Treasury bonds and notes remain popular overseas, foreigners were net sellers of U.S. corporate bonds and short-dated government bonds like T-bills. Capital flows into other assets like agency bonds and equities were also modestly positive, but the real driver of TIC flows in May was Treasuries.
U.S. residents were still net buyers of foreign securities in May, but the $15.2 billion dollar net outflow is the smallest we have seen in the past three months.
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