Preview: Treasury International Capital Report – Judging Foreign Demand for US Debt

Back in late December we wrote a commentary on US money markets and the holdings of US Treasuries via custodial accounts. In the latter part of December we saw outflows during December, and the latest figures continue to show those custodial accounts dumping Treasuries.

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With Wednesday's TIC (Treasury Internation Capital) release we are concerned with the November part of this graph that does show some significant inflows into these custodial accounts. Granted, if we look one step ahead we see that the total holdings (black line) has turned downward - a worrisome prospect - but let's not get ahead of ourselves.

For November coming as it did with turbulence in the commodity and stock markets, a flow towards the safety of the US bond market makes sense and so this figure - which can be quite volatile - will be measured as an indicator for the overall demand for US securities.

The expectation is for a net inflow of $27.3 billion in long term purchases.

Here's a graph of TIC flows for the last 4 years (unfortunately it does not reflect revision, which can be large at times, but it still shows us the major trend we want to point out):

As we can see above, the actual figures (in blue) have undershot the forecast (red line) for most of 2011, though there was a strong jump in August and September, and then undershot expectations again in October.

One key player here is China, which had been generally adding Treasuries during the middle of the year, and then started reducing its holdings heavily in August and October. Let's see what November brings from the Big Panda.

It's not only bonds that the TIC measures but also interest in equities.

From ZeroHedge: Given the upside surprises in the US data through the last 4 months of last year, we will examine the TIC data for signs that foreign buying of US assets, particularly equity, has picked up.

The October data showed a rebound in foreign interest in US equity after 3 months of net selling, however the equity inflow that month was tiny compared to history.

Foreign demand for USTs dropped sharply as the 'operation twist' trade was unwound. If foreign buying of US equity is strong, it would provide evidence that relatively strong US growth is behind the decent Dollar TWI performance since last September, rather than just risk aversion. More broadly, the TIC data indicates the extent to which the US current account is being financed by sustained inflows.

Positive data buttresses the case that the US is a safe haven during these turbulent times and supports the case that bonds are a safe haven. However, if more countries cut their holdings of bonds, that can undermine the US Dollar. The impact of this report is sometimes minimal because it is dated, but it carries important implications for the overall context of the financial markets and therefore, while sometimes an obscure report, should be paid attention to, and a surprise reading can have immediate consequences for the durability of the US capital position vis-a-vis the world.

- Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.