International capital flows suggest that both foreign central banks and foreign private investors sold Treasuries in June at the fastest pace on record as global markets came to grips with Fed tapering.
Foreign Central Bank Demand Holds Up
- In 2010 and 2011, foreign assets poured into U.S. securities in general and into Treasuries specifically. The sovereign debt crisis in Europe made dollar-denominated U.S. government bonds a desirable alternative.
- That dynamic is unwinding in a big way. Not only is the Federal Reserve likely to dial back its plans in buying Treasuries, the Eurozone is gradually returning to growth mode.
This Is Not 2007
- Long-term flows, which is the sum of gross foreign purchases less the sum of gross sales by foreigners to U.S. residents, posted the largest monthly outflow since August 2007. The selloff then was primarily in the MBS market and was the precursor to the financial crisis. We do not view this as a similar “shot across the bow” but rather just an unwinding of some of the flight to quality from 2010 combined with tapering.
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