On the final trading day of 2011, with thin liquidity, let's take a step back and see where money is flowing it the general financial markets over the last couple of months as two stories caught my eye recently on this point.
First today in the financial times we see that US money market funds have seen it there biggest inflows since the height of the financial crisis in November and December.
From Financial Times: The funds took in $54.9bn in November and another $36.8bn by December 21, according to data from Lipper. That is the largest two-month inflow since December 2008 and January 2009, when $195bn was invested.
The flows are consistent with general risk aversion and a fear of exposure to non-US credit risk, added Joseph Abate, money market strategist at Barclays Capital.
Money market funds invest in highly liquid securities such as US Treasuries and short-term debt issued by financial institutions. The sector is used by institutional investors to park large amounts of cash not invested elsewhere.
What this shows us is that in a period of uncertainty we continue to see U.S. Treasury's performing admirably as 10-year yield holds below the 2% level.
Recent demand at Treasury auctions have been strong and in an uncertain world U.S. Treasury continue to remain the most liquid and safest asset despite very poor yields.
From Bloomberg: The U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits.
The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The U.S. drew an all-time high bid-to- cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.
U.S. debt returned 9.6 percent in 2011, according to Bank of America Merrill Lynch data, even after Standard & Poor's cut the nation's AAA rating on Aug. 5. German bunds also gained 9.6 percent, Japanese bonds advanced 2.1 percent and U.S. corporate debt rallied 6.6 percent. Treasuries are poised to beat stocks, commodities and the dollar for the year.
Or is this the case only with US investors? From ZeroHedge.com, we learn today that foreign investors dumped a record amount of Treasuries in December by looking at custodial accounts.
From ZeroHedge: As the Fed's critical H.4.1 weekly update shows (which is leaps and bounds more accurate than the Treasury's TIC international fund flow data), in the week ended December 28, foreign investors sold the second highest amount of US bonds in history, or $23 billion, bringing total UST custodial holdings to $2.67 trillion, a level first crossed to the upside back in April. This number peaked at $2.75 trillion in mid-August, and as the chart below shows the foreign holdings of US paper have been virtually flat in all of 2011, something which is in stark contrast with what the price of the 10 Year would indicate vis-a-vis investor demand.
The most recent Treasury International Capital data showed that China was a net seller of Treasuries in October (the month of the latest figures).
From Wall Street Journal: China sold U.S. Treasurys in October, reducing its net holdings but remaining the largest foreign holder amid the sovereign debt crisis in Europe, the Treasury Department said Thursday. Overall, foreigners were net buyers of long-term U.S. securities in October, according to the monthly Treasury International Capital report, known as TIC.
Among all foreign investors, net purchases of U.S. Treasury notes and bonds totaled $7.57 billion, compared with net buying of $84.39 billion in September. Private foreign investors bought a net in $14.24 billion Treasury notes and bonds, after buying a net of $46.81 billion the previous month.
The TIC data doesn't square up with the custodial holdings data and therefore we have to continue to monitor this development as we move into 2012. Do US Treasuries continue to be a safe haven and is the demand for US treasuries coming from sources outside the US, or is it only US investors and the movement in the longer end of the yield curve primarily driven by central bank intervention?
At the same time, again via the reporting of ZeroHedge, we see that redemptions at US equity mutual funds continued unabated and now total $135 billion for the year.
What that implies is a flight of capital from US stocks, bonds, and short-term money market instruments. Again this could be seen as an increase in the level of uncertainty around financial assets and investors deciding to keep their money safe in the form of cash and away from markets that trade with an air of uncertainty because of central bank intervention.
Will these flows reverse in 2012 even though the economic environment will continue to be challenging as the globe deals with the continuation of the euro zone sovereign debt and banking issues in Europe, a slowdown in China, and the US begins to hit its limits in terms of fiscal and monetary stimulus for the markets.
The demand for US treasuries will have an important impact on the US dollar throughout next year and is a story that we will continue to monitor and keep you abreast of key developments.