Foreign Investors Exiting US Debt
As shown below, foreign investors were purchasing US debt securities at a seasonally adjusted annual rate of $1,339 billion 1Q'07. By Q3'08, foreign debt purchases had declined to an annual rate of $227 billion.
Even worse, when Treasuries are subtracted, the foreign purchases of US debt decline from a purchase rate of $1,006 billion to a selling rate of $592 billion.
So there is over $200 billion per month less foreign dollars available for lending in the US compared with the beginning of 2007. This accounts for a large part of the "freezing up of credit markets".
Q1'07 Q3'07 Q1'08 Q3'08
Open market paper 38.7 -80.6 23.6 -194.2
Treasury securities 332.9 166.4 607.6 818.6
Agency & GSE-backed 202.6 238.9 188.4 -241.1
Long-term munis 8.7 -24.9 2 12
Corporate bonds 721.8 32.6 4.7 -126.3
Corp loans, advances 34.7 236.8 -87.1 -42.2
Total 1339.4 569.2 739.2 226.8
Non-Treasury 1006.5 402.8 131.6 -591.8
From Federal Reserve, "Flow of Funds Accounts of the United States - Flows and
Outstandings, Third Quarter 2008"
Correction -- "So there is over $133 billion per month less foreign dollars available for lending in the US compared with the beginning of 2007."
February 11, 2009 5:56 PM | Reply | Permalink
Might these numbers be missing some non-official flows? Brad Setser over at CFR in his coverage of these issues tends to see no outflow when you take into account the money flowing in through the backdoor, so to speak.
btw. you seem to know a lot about the pricing issues of these more exotic securities. I've posted a thing on the problems facing Geithner on 'stress-testing'
http://tpmcafe.talkingpointsmemo.com/talk/blogs/obey/2009/02/has-geithner-got-the-right-ide.php
It'd be great to see your thoughts on these issues - in a post or comments...
February 11, 2009 6:08 PM | Reply | Permalink
Setser's blog doesn't appear to contradict the premise that foreign investors are exiting US debt securities.
His post "Should the US worry about the drop in foreign demand for US long-term assets?", Jan 21, 2009, shows a graph that has a sharp decline in this demand late in 2008. This presumably a fraction of the flow in the data I quoted above, since Setser's graph is for "long-term" only.
In other posts he shows a declining balance of trade deficit. This is also consistent, since it would provide fewer dollars for foreigners to invest in US debt securities, although it would only account for at most 1/6 of the decline.
There are other flows of funds not included in the debt line items. Although some of these are fairly large, the total flow of funds follows the decline in debt purchases pretty well.
February 11, 2009 8:57 PM | Reply | Permalink
Thanks for the details! But the decreasing flow of incoming dollars need not impact credit flows on a 1 to 1 basis. Maybe just means we're importing less. or maybe I'm tired...
February 11, 2009 9:06 PM | Reply | Permalink
I think the way it works is as follows:
Suppose that you buy $1 M of toys from a Hong Kong wholesaler and the wholesaler deposits the money in HSBC in Hong Kong.
If HSBC shifts the dollars to London and buys a Eurodollar bond of an Irish manufacturer, it doesn't appear in the table above.
If HSBC buys a Ginne Mae bond, it appears on the third line "agency and GSE" above. In this case, it also gets the securitized mortgages off Ginne Mae's books and Ginnie Mae can make another $1M in mortgage loans.
So dollars that are spent on imports can get invested back in US debt or they can be held in off-shore dollar-denominated investments (or they can be used to buy US goods and services, but we are running a trade deficit).
If foreigners buy less US debt (such as commerical paper, asset backed securities, commerical or residential mortgage backed securities, etc), there are fewer dollars to lend to US businesses and consumers, unless the shortfall is made up by increased US savings.
February 11, 2009 9:50 PM | Reply | Permalink
Do you have data on holdings, not just rate of change (the data you present)? It's quite astounding to see a $1.6T reversal of flow in 18 months. But I suppose Sept. 2008 could have been a huge sell-off part of Q3.
February 11, 2009 9:46 PM | Reply | Permalink
I don't have any data for 2008 total holdings. The closest that I was able to find was June 2007 data in "Report on Foreign Portfolio Holdings of U.S. Securities as of June 30, 2007", Department of the Treasury, Federal Reserve Bank of New York, Board of Governors of the Federal Reserve System, Published April 2008
Marketable Treasury Securities owned by foreigners stood at $1,965 billion, up from $1,727 billion a year earlier.
US Government agency owned by foreigners stood at $1,304 billion, up from $984 billion a year earlier.
Corporate and Other Debt owned by foreigners stood at $2,738 billion, up from $2,021 billion a year earlier.
The report is available at http://www.treas.gov/tic/fpis.shtml
See Table 2. Value of foreign-owned U.S. long-term securities and share of the total
outstanding, by asset class, as of selected survey dates
You may also find http://www.treas.gov/tic/exhibitsc&d.pdf of interest since it shows US purchases of foreign debt going negative before foreign puchases of US debt go negative.
February 11, 2009 10:24 PM | Reply | Permalink