Thursday, August 20, 2009

Record Treasury Demand

Been meaning to get to this...

The worry has been that record issuance would not be met with record demand. Lets put away that concern for the time being. AHN with the detailed:

More long-term U.S. financial assets were in demand by foreigners in June, indicating continued interest in the country's bonds, an official report said Monday.

The Treasury Department report released in Washington showed that net foreign purchases of long-term securities were $90.7 billion, compared to net sales of $19.4 billion in May.

The Treasury International Capital data noted that total foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $71.3 billion.

Total purchases of U.S. government notes and bonds amounted to $100.5 billion, the highest on records since the data collection started in 1977, compared to total selling of $22.6 billion the prior month.
And as the chart below shows, there was very strong demand for Treasuries from foreign buyers in June. There is some short-term noise (i.e. China cut their holdings of Treasuries in June), but much of this can apparently be explained by the unbelievably strong demand coming from the U.K. Of the $48.6 billion in Treasury purchases by European nations, $45.7 billion of that was made by the U.K. (yes, more than 94%!).



But why? According to Standard Charter (hat tip FT Alphaville):
The official TICS data underestimates China’s holdings, partly because China purchases debt through intermediaries - most notably through brokers in London. These do not show up in the TICS data under China’s name, but are instead classified under the UK. This ‘error’ in the monthly survey is made clear in the annual survey, which usually ends up reallocating most of the UK purchases during the previous year to China.
So while China's purchases of Treasuries has been relatively flat since the Spring, the U.K. spike may likely be those purchases.



And the long run trend shows that demand (in overall dollar terms) continues to come from China, regardless of how the purchases are being accounted for.

Top Ten Holders of Treasuries


Source: Treasury: Long Term Securities / Treasuries