Economic indicators and earnings shrug off events overseas (Part 4 of 10)
U.S. Treasury Department’s Treasury International Capital July release
On Wednesday, July 16, the U.S. Treasury Department released the Treasury International Capital (or TIC) report for the month of May. The TIC reports on cross-border portfolio investment flows and positions between U.S. and foreign residents on a monthly basis. Although the TIC is reported with a two-month lag, it provides useful information to fixed income investors about the demand and supply of Treasury securities in the U.S. and abroad.
Key takeaways from this month’s release
The TIC reported a net outflow in net foreign acquisitions of long and short-term securities and banking inflows of ~$35.5 billion in May, 2014—down almost 71% from April’s revised downward net inflow of $120.9 billion. Net foreign private inflows were $13.1 billion, while net foreign official inflows were $22.4 billion. A net inflow implies that foreign investors and institutions purchased more securities in the U.S. than purchases made by U.S. residents and institutions abroad. An outflow would have implied the opposite.
Net foreign purchases of long-term securities came in at $19.4 billion. Overall, net foreign purchases of long-term securities were estimated at $9 billion in May.
Foreign resident holdings of long-term U.S. securities in May increased by $34.6 billion, net. This included net purchases by private foreign investors at $10.2 billion and net purchases of $24.4 billion made by foreign official institutions.
Foreign country holdings
Net foreign holdings of U.S. Treasuries increased to a record of $5.976 trillion in May—an increase of ~$15.1 billion over April. China and Japan, the two largest foreign U.S. creditors, both increased their positions in Treasury securities by $7.7 billion and $10.4 billion, respectively, in May. China and Japan’s holdings of Treasury securities stood at $1.27 trillion and $1.26 trillion, respectively, at the end of May.
Other countries, increasing their holdings of U.S. Treasury securities included Ireland, by $5.8 billion, and Brazil and Singapore, both increasing holdings by $5.3 billion each.
Major sellers of U.S. Treasury securities included the UK at $5.7 billion, the Netherlands at $5.6 billion, Russia at $5 billion, and Belgium at $4 billion.
Investor implications of the TIC
Although the report has its limitations and doesn’t capture all the data below certain threshold limits and has institutional constraints, it gives bond investors an estimate for the demand for U.S. securities abroad.
The TIC report has gained in importance in recent months. This is because demand for long-term U.S. Treasury securities (TLT) and investment-grade debt (LQD) has increased recently. Geopolitical risks abroad, in Russia-Ukraine and the Middle East, have caused a shift to U.S. investment-grade bond markets (BND) that are perceived to be safer.
As economic growth gains traction, yields on bonds usually increase resulting in falling bond prices. However, foreign demand due to rising geo-political risks abroad, has bolstered investment-grade bond (AGG) prices. This has more than made up for the decline in yields, due to a recovering economy. The S&P 500 Index (IVV) has reached record after record this year, but bond market returns have been positive for the most part due to overseas demand.
The next two sections will cover the major housing market indicators that released last week.
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