From today’s Reuters:
Given this lack of guidance from data and the Fed, this week’s $38 billion quarterly Treasury refunding will be a fresh test of foreigners’ appetite for U.S. bonds.
Analysts said the uncertain rate outlook and the broad decline in bond prices since early December may leave foreign investors thinking twice about jumping into the refunding.
Foreign interest in new debt is showing signs of waning.
In the last notes sale about two weeks ago, indirect bids — the best measure of foreign demand for Treasuries — for five-year notes amounted to 21.80 percent of total bids, off sharply from the 48.8 percent in the prior auction at the end of 2006.
“We will see less aggressive participation than in the past,” said Mustafa Chowdhury, head of U.S. rates research at Deutsche Bank Securities in New York.
“You could see the lack of foreign demand with the lack of follow-through in the recent rallies,” he added.
This discussion is focused on private actor behavior. What’s interesting is how much hinges on state actors and central banks:
Not all foreign players are hesitant to pick up their pace of Treasury purchases at these higher yield levels.
For instance, overseas central banks’ holding of Treasuries rose by $6.2 billion to $1.79 trillion in the week ended January 31, according to the Fed.
But even strong central bank demand may not enough to boost overall foreign demand for Treasuries.
“Foreign buyers will stick to the short end. There will be less foreign demand at this refunding,” Deutsche’s Chowdhury said.
So, while it’s true that the total and ex.-oil trade balance to GDP ratio has been declining in the U.S., it’s important to remember that it’s the total dollar value of the trade deficit (actually current account deficit) that has to be financed by capital inflows. The less enthusiastic the foreign investor is, the higher U.S. interest rates have to be, the weaker the dollar has to be, or the more willing foreign central banks have to be, in order to maintain the current level of borrowing.
Technorati Tags: trade deficits,
exchange rate,
interest rates,
capital flows,
central banks,
Treasury bonds
Just when Setser sounds resigned to the position that the kindness of strangers knows no bounds, Menzie spies the poor showing of CBs at the last auction and sketches out something less resigned. Just a soft patch maybe? Didn’t China tell us that they were looking at other paper bits: corporate debt etc? Japan has actually performed worse than China with its kindness, no?
The dollar did slide vs the yen and when this occurred in the past (2002?) BoJ was intervening in fx to prop up the dollar and maintain it’s exports, yes? So I expect the dollar not to slide very far again, but seriously don’t know why private foreign investors would buy tbills. Seriously, HFs buy tbills and expect their principals to take 2% of the profits off the top? So you can see what a novice I B.
A Race between Inflows and the Deficit
[Source: Econbrowser] quoted: Analysts said the uncertain rate outlook and the broad decline in bond prices since early December may leave foreign investors thinking twice about jumping into the refunding.
I don’t understand this:
The dollar is *extremely* sensitive to US rates. If US rates go up, the dollar goes up.
I suppose what you are saying is that one of those three things will have to happen.
Which, of course, brings us to the question: Does the Fed really have a free hand setting rates?
If Bernanke so much as whispers that rates might go down, the dollar is going to crash like a rock.
Ummmm…the indirect bid at the 3-year auction was considerably above the recent average. That is not absolute evidence of strong foreign (or central bank) participation, but it is a fair gauge. Me thinks Reuters simply missed the boat on this one, at least for the first leg of the refunding. It probably helped that the refunding is small by recent standards. The same sized indirect bid now is a bigger share of auction totals now than in other recent refundings. By all accounts, the 3-year was a thunderous success. Let’s see what happens today.
The less enthusiastic the foreign investor is, the higher U.S. interest rates have to be, the weaker the dollar has to be, or the more willing foreign central banks have to be, in order to maintain the current level of borrowing.
Menzie,
What do you mean when you say that the dollar has to be weaker?
Ummmm…the indirect bid at the 3-year auction was considerably above the recent average. That is not absolute evidence of strong foreign (or central bank) participation, but it is a fair gauge. Me thinks Reuters simply missed the boat on this one…
kharris,
Yes.
It seems that analysis of US bond sales is more linked to internationsl political considerations than to economic reality. Economics drives foreign bond investment.
Perhaps Reuters missed this little tid bit from the International Herald Tribune.
The IMF’s operating revenues have fallen as Brazil, the Philippines, Uruguay other countries paid off their loans ahead of schedule. With the number of loans declining, the IMF does not generate enough income from interest payments on existing loans to cover operating expenses.
With other countries such as Turkey, the IMF’s biggest borrower, likely to repay their loans, the report said IMF income will fall further.
The IMF is facing an operating shortfall of $110 million (85 million) in the current fiscal year.
http://www.iht.com/articles/ap/2007/01/31/america/NA-FIN-IMF-Finances.php
The countries of the world are riding the US prosperity.
I had to laugh. The IMF should be an organization with the purpose of increasing economic prosperity in the world, but when prosperity comes the IMF becomes insolvent. What is ironic is that the IMF neither reduces expenses or would it ever consider going out of business. What is obvious is that it has a vested interest in economic instability in the world. Current world prosperity is proving how impotent and irrelevant the IMF actually is.
kharris,
The Anonymous is me just so you will know. I don’t know why it showed Anonymous because I had my name in. Oh well.
Good post menzie. This is info I want to know. Just as we awe at foreign demand for US Treasuries, they must stand agape at our ability to produce debt.
IMHO, the single most important economic parameter is long-term interest rates. When they start to go up, and they eventually will, then the gig will be up. The dollar will eaken, as you say, and the US will have a terrible time trying to pull itself out of recession because our buying power will be diminished and thus we won’t be able to buy oil for cheap..which has been a player in previous economic recoveries.
I’m not trying to predict the end of America, but the numbers are so big….
I believe the reality is this – if you have grillions of dollars, there’s really only one place you can put them. The US debt market. Period.
There is no other market in the world that has the size to accomodate trillions of dollars. The Chinese, Japanese, Saudis, et al have no choice. Sure, they can fiddle around the edges by adjusting the compositions of their portfolios, but they really can’t make any significant changes because there is no other place to go.
Well, regarding setser, it seems that he is counting on the yen-based carry trade. Do you think that will suffice to hold things up, Menzie?