Update (June 20) – I added a section at the end of the post with information on specific countries. Also, the data shown here combines cross-border transactions in both U.S. and foreign long-term securities (I may not have made this clear enough in the initial post). Further, foreigners’ net purchases of -$64 billion in the most recent period (Feb. 2013 through Apr. 2013) are explained mostly by foreign stocks. Foreigners sold a net total of $62 billion of non-U.S. stocks to U.S. residents.
There was plenty to puzzle over in last week’s Treasury International Capital (TIC) report, which reveals cross-border financial flows for April.
I showed on Friday that net foreign sales of U.S. Treasuries (bonds, notes and bills) totaled $69.6 billion, shattering the previous record of $28.1 billion. I also showed that Japan’s Treasury holdings fell by $61 billion after last October, which was roughly the same time that Abenomics was hatched and the Japanese stock market took flight.
But that’s not all.
This morning I went back to the report for a closer look at cross-border, long-term security transactions. This category includes government bonds, corporate bonds and stocks. It usually shows that Americans are selling securities to foreigners – the flip side to the gaping U.S. current account deficit. We buy stuff from foreign exporters, and then most of our dollars find their way back to America in the form of security purchases (both U.S. securities and foreign securities that Americans sell back to global investors).
The measure that caught my eye in April’s report – “net long-term security transactions” – compares the amount of long-term securities that U.S. residents sold to foreigners to the amount that they’ve bought from foreigners. It’s usually a positive number, indicating Americans are doing more selling than buying.
Here’s the chart:
And here’s a short summary of the highlighted periods (when America’s cross-border buying approached or exceeded her selling):
- July to September 1998. New York Fed orchestrates Long-Term Capital Management (LTCM) bailout; Russia defaults; S&P 500 drops 19% from its peak in mid-July to the end of August and then double-dips in early October before recovering.
- July to September 2007. Quantitative equity managers suffer unprecedented losses; bank earnings collapse on subprime-related write offs; bear market begins in mid-October and the economy peaks two months later.
- October 2008 to January 2009. Financial crisis triggers sharp contraction in global economy; S&P 500 falls to a low of 666 on March 9 before recovering.
- June to July 2011. Debt ceiling negotiations run to the wire as some participants openly discuss the possibility of a U.S. default; S&P 500 peaks in early July and drops 19% to a low of just below 1100 in early October.
- February 2013 to ? Did the S&P 500’s May 21 close of 1669.16 mark the peak?
Just like April’s record U.S. Treasury sales that I noted Friday, net cross-border transactions of long-term securities also sank to a new record when you consider the three month periods shown in the chart. And both records extend all the way back to the inception of TIC data in 1978.
(I limited the chart to the last 15 years because the current account balance fluctuated below and occasionally above zero for much of the time before 1998, which means that net cross-border transactions were frequently negative. During and after 1998, the current account balance was consistently below -2% of GDP.)
Explaining the new record (or not)
It’s hard to find an obvious trigger for this year’s record cross-border buying. America’s economy has been stronger than much of the rest of the world, and this should be strengthening the purchasing power of U.S. versus foreign investors. It seems a partial explanation at best, though, especially as America’s current account deficit remained just below 3% of GDP in the first quarter.
And while most risky assets performed well through April, it’s not clear that rising prices would have caused foreigners to sell their holdings to Americans.
What about quantitative easing? Is Fed-created liquidity distorting cross-border financial flows?
This may be the best explanation of all, but there’s not a close fit between QE start and end dates and the peaks and troughs in the transactions data.
Regardless of what’s happening underneath the surface, I suggest keeping an eye on upcoming data. If market volatility hasn’t been enough to spook you over the past month or so, the TIC report should add to your caution.
The chart below shows the ten countries with the largest (negative or positive) net long-term security transactions with U.S. residents in the most recent three month period. As shown above, net long-term security purchases by foreigners sank to an all-time record of -$64 billion during this period.
Japan’s total includes $34 billion in net sales of U.S. government bonds and $26 billion in net sales of global stocks (of which $12 billion were U.S. stocks and $14 billion were non-U.S. stocks). The total net sales of $65 billion by Japan’s official and private sectors seem to tie into the Abenomics effect that I discussed here.
And for the next three largest sellers, the combined cross-border transactions for Belgium, U.K. and Luxembourg are dominated by large net sales of foreign securities ($47 billion in non-U.S. bonds and $35 billion in non-U.S. stocks).