Treasury-Reported International Capital Data Illuminate Two Paradoxes

August 16, 2010

According to the release of Treasury Department TIC flow data, Chinese holdings of Treasury securities fell by 24.0 billion in June and were $51.5 billion lower at midyear than at the end of April.  This news comes after a night of stories out of Asia that Chinese officials are discretely diversifying the country’s reserve portfolio to raise shares of euro and yen, and it was accompanied by other data showing OPEC’s Treasury holdings off $12.1 billion in June and down by $16.3 billion in the last two reported months.  Between them, these two holders of substantial dollar-denominated assets reduced their Treasury holdings by $68.8 billion in the latest two reported months.  Chinese Treasury holdings are $96 billion below their level in July 2009. 

A spike in risk aversion during the third quarter probably elicited a greater predisposition for U.S. dollars more recently, but the point to learn from today’s data is that high risk aversion is not required to support the Treasury market.  The Treasury holdings by foreigners other than OPEC and China advanced $120 billion in May-June, and the ten-year Treasury yields declined 73 basis points between the end of April and end-June from 3.66% to 2.93%, and such has dropped by a further 34 basis points more recently.  In spite of lessening Chinese buying, the present 10-year yield of 2.59% lies 107 basis points or 29.2% below its end-April level.

Another paradox is that the dollar appreciated during the second quarter despite a widening goods and services trade deficit and, according to the TIC data,  lessening capital flow support.  The table below summarizes period flows expressed on a per month basis in billions of dollars.  The Treasury provides three net aggregates of capital flows, of which the first is the narrowest definition and the one labeled definition #3 is the broadest and includes short-term as well as long-term movements.  The table’s final row is the percentage of net total foreign purchases of U.S. securities ascribed to officials.  Private capital movements are generally more sensitive to changes in economic fundamentals than official capital movements, so a rise in the ratio, which means lessening relative dollar support from private sources, suggests a more vulnerable dollar.  One would expect the dollar to have a stronger value when net capital inflows exceed the outflow associated with the trade balance by a larger margin.  This was the case in the first quarter, not the second quarter.  Between the end of March and the end of June, however, the dollar appreciated 10.5% against the euro, twice as much as it fell against the yen, and there was a 3.6% advance of the trade-weighted dollar.

Bln of USD per Mo 2009 1Q10 2Q10 June
Def’n #1 +36.8 +67.9 +53.7 +44.4
Def’n #2 +19.8 +54.0 +33.2 +23.5
Def’n #3 -26.5 +4.5 +19.5 -6.7
Trade gap -31.2 -38.4 -44.1 -49.9
Official ratio 20.0% 11.1% +24.9% +51.1%

 

Two other U.S. economic indicators released this morning were weaker than anticipated.  New York’s manufacturing activity index only recovered to 7.10 in August from 5.08 in July after slumping from 19.57 in June and 31.86 in April.  The post-recession high of 33.44 occurred last October, and the recession low of minus 32.29 was printed in March 2009.  The monthly NAHB index, a gauge of U.S. homebuilder optimism, slid a point to a 17-month low of 13 in August from 14 in July and 16 in June.  Street analysts were anticipating an uptick to 15.  Finally, Canadian existing home sales, which were reported to have dropped 6.8% last month after a decline of 8.2% in June, provided yet another indication that the North American economy is losing momentum.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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