Printer Friendly

eMail Article

February 25, 2005

Foreign Central Banks Bought $20B of Treasuries Last Week
by Bud Conrad

As new data on foreign investment pours in each week, I look to see whether the bail-out of our deficit continues. This week foreign purchases of Treasuries by Foreign Central jumped by $20B. Another $2B of Agency debt was purchased. Because the last few weeks have shown very little buying, the quarterly total of buying is still much lower than it was a year ago.

Below is an updated chart showing foreign central bank purchases of Treasuries and Agencies held in custody at the Federal Reserve. It is the "early warning" data on how much - or how little - foreigners are purchasing.

The source for these investments by foreigners is the dollars collected by countries that sell us goods. The economic theory and accounting assumption is that our deficits come back to us in the form of investment. US trade deficits have been growing as much manufacturing is now done abroad with cheap labor, and the cost of imports, primarily oil have risen. Below is a look at the trade deficit and the net cross border investment flow. In general, they move together, but the investment flows are much more volatile. The trade deficit scale inverted. They move in parallel, but with a lot more volatility for the investment. Trade is based on longer term contracts, but investment can be made or removed in a day. This is monthly data, and the investment includes purchases of corporate bonds and equities, both by foreigners and by the US, so this is a more inclusive tabulation than the above. The point is that investment volatility is high.

My conclusion is that this one big jump in weekly purchases by central banks should be watched because it is so big, but that it may just be a one-week surprise. The quarterly view still shows that foreigners are slowing their purchases. Interest rates are up and the dollar is down since I started this analysis, which is consistent with that slowing.

Bud Conrad

Mr. Conrad holds a Bachelor of Engineering degree from Yale and an MBA from Harvard. He has held positions with IBM, CDC, Amdahl, and Tandem. Currently, he serves as a local board member of the National Association of Business Economics and teaches graduate courses in investing at Golden Gate University. Bud Conrad has been a futures investor for 25 years and a full-time investor for a decade.

Copyright © 2005-2009 Bud Conrad and Macronalysis

Image rendition and html coding Copyright © 2000-2009 SafeHaven.com

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »