02 Feb 2018
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In the spirit of concerns over foreign flows I’m looking at some perhaps arcane aspects to such activity that both confirm what the market has already talked about and perhaps adds somewhat counter-trend perspectives to foreign flows using Informa’s EPFR data.
This first chart in this set shows Treasury International Capital System data more commonly known at TIC data. First, what’s evident is that there’s been some deep selling of Treasuries since pretty much the middle of 2014 by foreign official accounts, i.e. central banks. Most notable as well as old news is China’s FX holdings which are now a hair under $3 trillion. They peaked at about $4 trillion in 2014. That speaks to most of the action. Japan’s FX reserves are $1.17 trillion against a peak of $1.22 trillion in 2012. Overall Fed Custody Holdings stand at $3.16 trillion having topped out at $3.38 trillion in the middle of 2015.
The details of the TIC data are a bit more interesting though with the inevitable caution that they can be misleading if, for example, a foreign entity harbors its holdings in another location. For example, between November 2013 and March of 2014, little Belgium saw its holdings of Treasuries rise from under $150 bn to over $350 bn. Now either they sold an awful lot of chocolate OR some other foreign entity parked their money there for a little while. We can speculate on whom that was but the more interesting and telling point is that today Belgium holds less than $90 bn.
Still, it’s worth talking about, as this next chart makes clear. Here you’ll see the monthly purchases, and sales, of Treasury and MBS/Agency debt. The bars represent private activity and the lines are for ‘official’ activity. It’s clear that there’s been a lot of official selling in Treasuries but all of that is nearly offset by private buyers (pensions, investors, and the like). If you add in the MBS/Agency buying it pretty much neutralizes the central bank selling. Note the red line and blue bars in the upper panel. After sizeable selling in September and October, the selling slowed sharply in November. That’s where our EPFR data comes in to play.
In case you didn’t know, EPFR measures flows in and out of mutual funds and ETFs across the global asset class spectrum. What I’ve done is dive into more recent flows (the last 60 days) for US FI assets; governments, corporates, MBS and TIPs to see what foreigners are doing. The zero is the starting point 60 days back so if the latest shows, say, $100 mn it means they bought $100 mn over that timeframe.
Anyway, the chart above shows foreign flows around short, intermediate and long US government bond funds. There was brisk selling of short funds into the Fed hike but that’s starting to subside with modest positive flows. Likewise with intermediate funds. Long duration government funds have been steady with a small uptick recently.
MBS funds saw sharp selling, but those flows have turned positive as well since the middle of January. Intermediate corporate bond funds saw a surge in buying in late January after a hiatus since the election which seems to have come at the expense of some selling of long term corporate bonds. Remember these are all about foreign flows.
Interestingly, US investors (I didn’t put these charts up) have seen steady buying in MBS of the same 60 days with holdings up near 2%, or $330 mn, in specific MBS funds. US domestic investors have had more faith in Intermediate corporate bond funds, with virtually no selling the last 60 days and a marked pickup in buying since the start of the year.
David Ader is Chief Macro Strategist for Informa Financial Intelligence
Bringing 30 years of investment strategy experience to his role at Informa Financial Intelligence, David Ader has held senior positions at major investment banks and financial information firms as well as serving on investment policy committees and management teams. Most recently Partner, Head of Government Bond Strategy for CRT Capital, he headed the team voted #1 in U.S. Rates Strategy for the last 11 years and #1 in Technical Analysis for the last five years in Institutional Investor’s annual survey.
IGM FX and Rates, IGM Credit
By Marcus Dewsnap 20 Nov 2017
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