Foreign Demand for U.S. Treasuries Is Still Strong

by: Kathy Lien November 18, 2008 | about stocks: UDN / UUP    

Kathy Lien

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Despite the turmoil in the US financial markets, foreign demand for US securities remain robust, particularly since the Treasury’s International Capital flow report was for September, the month that Lehman collapsed.

TIC Report Explains Dollar Rally

Demand was particularly strong for US Treasuries and equities but foreigners dumped corporate bonds on the fear of default risk. As a testament to China’s rising economic power, they have now surpassed Japan as the largest holder of US debt. In September, increased repatriation led to a net sale of US securities by the Japanese while China accumulated a growing amount of US securities for the third consecutive month. The increase in foreign holdings of US debt helps to explains the dollar’s recent rally because despite higher issuance, demand for US Treasuries remains voracious.

Top 5 Owners of US Treasury Securities

Watch out for Paulson and Bernanke

The strong TIC report and the positive news from the tech sector is helping to fuel a recovery in Dow futures, which is driving the US dollar and Japanese Yen lower. We could see a recovery in carry trades today as long as Bernanke and Paulson don’t rain on the party when they testify on the government’s implementation of the $700B bailout plan before the House Financial Services Committee. This is a big risk since Paulson indicated yesterday that he will be leaving the clean up job for the new Administration. He does not plan on requesting the second half of the $700B bailout plan to leave firepower for Obama’s team. If Paulson continues to wash his hands of this mess, the market may begin to sell off once again, driving carry trades lower on the fear that nothing new will be implemented until Obama takes office. With 8 weeks to go before Bush leaves office, the current Administration is more focused on wrapping things up than starting new initiatives.

Higher Core Prices Will Not Stop the Fed From Easing Rates in December

Headline producer prices saw the largest drop on record, but core prices edged higher. The big drop was hardly a surprise because import prices, a leading indicator for producer prices fell as well. Although the jump in core prices is a bit surprising, lower headline prices should eventually filter into core prices while slowing global demand could naturally drive down prices. Inflation is not a problem and will not stop the Federal Reserve from easing interests again in December.

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This article has 7 comments:

  •  
    Nov 18 11:43 AM
    gosh i hope you mean billion
    Reply | Link to Comment
  •  
    Nov 18 11:56 AM
    USTreasury debt is apparently the new bubble. Lend money at 3% to the largest debtor on the face of the planet while said borrower is printing money like there's no tomorrow.

    When the worlds creditors acknowledge that their dollar backed US debt is losing value faster than it earns interest the bubble will pop, and even more misery will be dumped on the US population.

    Once again our politicians opt to kick the can down the road and let those in the future pay for our current problems.
    Reply | Link to Comment
  •  
    Nov 18 02:16 PM
    US and Japanese government bond markets are the biggest bubble at present. Hide when they burst!
    Reply | Link to Comment
  •  
    Nov 18 03:35 PM
    TBT is a good way to play that - if it would just @#(( work!
    Reply | Link to Comment
  •  
    Nov 19 08:23 AM
    Kathy, you past few posts are right on, in my view.
    Reply | Link to Comment
  •  
    Nov 19 11:19 AM
    Based on your TBT reference, I went and read many of your past comments. You are kindred.
    I have been thinking as you have; but lately I have been reluctant to commit to the 'short deflation, followed by big time inflation' senario. I have not been able to pull the trigger on TBT yet as I watch the long bond yields continue dropping. I know it has to end sometime; but until some sign of increased economic activity causes that huge money supply to jump in velosity, deflation could persist much longer.
    I'm frozen 'in the headlights', doing nothing.
    Have you found another way, in addition to TBT, to short the long bond?
    I will continue to follow your comments.
    P.S. Or the Chinese could ask for their money back. That would do it.


    On Nov 18 03:35 PM buyitcheap wrote:

    > TBT is a good way to play that - if it would just @#(( work!
    Reply | Link to Comment
  •  
    Nov 20 05:31 AM
    Thanks Kathy - good insight.
    Reply | Link to Comment
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