The US Capital Account Disaster

The spotlight is on the Federal Reserve Bank, this cannot be avoided by traditional fundamental data let alone the special topics such as the capital account. Nonetheless, we should pay particular attention to the latest portfolio flow data from the US, which reflect the unfavourable development of the last few months.

The massive liquidation of international Treasury holdings stands out most. While the first signs that demand was easing became apparent already at the end of 2014, the trend was not reinforced before mid-2015. Foreign investors have sold USD 420m in US Treasuries since then. Net purchases were last seen in February and March of this year. Since then sales have been on the agenda – and this trend is rising.

These sales are dominated by foreign central banks, which have been net sellers of US Treasuries since as early as the end of 2014 and have sold an almost unprecedented USD 609bn since then. Most notable is China, whose ongoing intervention to support the domestic currency required it to sell USD 154bn in US Treasury bonds this year alone. Private investors, whose Treasury purchases managed to serve as an equaliser, were the only reason why the US Treasury market could benefit from net inflows (at least initially). However, this has changed too. Net purchases by foreign private investors amounted to a meagre USD 49bn this year and were even significantly negative recently.

On the positive side, foreign demand for US agency bonds and corporate bonds has finally made an appreciable recovery. These markets reported commendable inflows of USD 387bn in the first ten months of the year, thus offsetting the sales of Treasuries. At USD 70bn, however, the net portfolio inflow from abroad is very low overall. The United State’s reliance on repatriation flows (USD 160bn in 2016 and 2015) has increased considerably instead.

Washington is no doubt watching the waning international demand with concern. The sale of US Treasuries is at least in some cases down to domestic factors (China’s intervention or the cash requirements of the large oil exporters). However, now that yields are rising and the Fed has stated that it will raise interest rates several times next year, concerns are likely to be growing that it could fail to get foreign investors back into the market.

 

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