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Major Foreign Holders of U.S. Treasuries: now with greater country breakouts

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES (in billions of dollars)

Don’t have a lot to say except to note that previous versions of this table lumped together “Oil Producers” and “Caribbean Banking Centers” while this disaggregates them. This leaves the Cayman Islands in third place at $265 bn while putting Saudi Arabia down to 13th with $116 bn.

Also of interest is how many of the top twelve are known banking centers and tax havens. Ireland (#4) isn’t holding $266 bn on its own account, Great Britain (#7) includes Crown Dependencies like the Channel Islands and the Isle of Man and we have our old friends Switzerland (#5) and the BeNeLux countries: Belgium (#11), Netherlands (#25), Luxembourg(#8). This is important because an unknown percentage of those ‘foreign’ holdings are actually the accounts of U.S. citizens and corporations.

FYI

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Central banks underpin euro and diversify toward "other currencies"

The IMF released its Q3 2010 Currency Composition of Official Foreign Exchange Reserves (COFER) report. The COFER database provides the breakdown of official central bank portfolio holdings by currency across advanced and emerging/developing market economies.

The picture is roughly half complete, as 44% of the global reserve positions go unallocated. But the trend in reported FX holdings indicates that central banks are supporting the euro, giving it a lower bound. Furthermore, there has been a shift in portfolio holdings toward “other currencies” in advanced and emerging market central bank portfolios.

According to the report, Q3 2010 total central bank reserve holdings increased to $9.0 trillion, up by $564.4 billion over the quarter. $317.7 billion of the increased asset holdings are not “allocated” a currency denomination (“unallocated reserves” in the charts below), but the rest, $247 billion new portfolio holdings, were denominated in the following currencies:

  • $107.7 billion in new assets denominated in US dollars
  • $3.4 billion in new British pound assets
  • $24.2 billion in new Japanese yen assets
  • $0.3 billion in new Swiss franc assets
  • $87.5 billion in new Eurozone euro assets
  • $23.6 billion in new “other currency” assets

Of note, the quarterly increase in euro assets is the largest since Q2 2009. Central banks saw the weak eurodollar as a buying opportunity, down to 1.2238 on 6/30/2010. Central bank demand at low prices will likely be an important buffer to eurodollar weakness going into 2011.

Central bank portfolio assets denominated in US dollars plummeted in late 2008 and early 2009, as global central banks faced sharp capital account outflows. Since then, US dollar-denominated assets have recovered, and so have those that are “unallocated”(those reserve portfolio holdings that go unreported), which surged $881 billion since Q1 2009.

Another important point, is that the share of allocated reserves for “other currencies” has increased from 1.8% in Q4 2007 to 4% in Q3 2010. This trend will likely hold into 2011, as global central banks diversify reserve assets. Candidates for “other currency assets” likely include those denominated in commodity currencies, Australian dollar or Canadian dollar, and those of strong Asian economies, perhaps Singapore dollar. The breakdown is unavailable.

A look at the Advanced reserve assets is interesting, since just 12.3% of total portfolio holdings go unallocated.

The chart illustrates the annual change in central bank portfolio holdings in the Advanced economies denominated by currency. Advanced central banks increased their US dollar assets by $196 billion (64% of reported reserves) since Q3 2009, and further increased euro asset holdings by $76.9 billion. The annual euro asset accumulation is down from the $146 billion peak in Q1 2010, but still above the decade average of $43 billion. Interestingly, advanced economies are accumulating assets denominated in “other currencies”, a new $42 billion over the year and well above the $5.8 billion average.

Emerging market central banks loaded up on US dollar assets in 2010, $137.9 billion over the year in Q3 2010 and further accumulated “other currency” assets, $25.7 billion over the year. Finally, emerging market central banks increased their holdings of euro assets in Q3 2010 after reducing euro positions for two consecutive quarters previously. Again, a lower bound seems to have been set to underpin the euro.

The annual increase in unallocated reserve assets in the emerging market space is large, $498 billion in Q3 2010. If history is any guide, though, then 65% of the new positions are denominated in US dollars. It’s also likely that a sizable portion is denominated in euro, since the euro had a very good run against the dollar in Q3, up 11.4% over the quarter.

We’ll see, but this analysis suggests that global central banks will underpin the eurodollar in the 1.20-1.25 range. Furthermore, commodity currency assets are very likely becoming more of a reserve position to central banks.

Rebecca Wilder

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Open Question: What is the Optimal Level of U.S. Public Debt?

by Bruce Webb

Back in 2000 Alan Greenspan warned Congress about the potential disappearance of the long bond in the face of continuing surpluses. He probably knew at the time that he was just feeding the appetites of tax-cutters, and not say advocating for using those surpluses for something like Universal Single Payer, but he wasn’t crazy, because to some extent the world is dependent on the existence of SOME amount of U.S. Treasuries just to keep the gears of the world economy going. For the time being the U.S. dollar is the biggest component of most other countries foreign exchange reserves and is also used to buy and sell many commodities, particularly crude oil.

So the question is How Low Can We Go? Where is the sweet spot in terms of the ratio of U.S. Debt Held by the Public and world GDP?

Now we know the answer in relation to Social Security, at least the statutory answer. The Trustees are mandated to target a Trust Fund ratio of 100 or one year of future cost at any given time. And since the annual cost of Social Security goes up every year due to changes in population and inflation the result is that even a perfectly balanced system will contribute that much more to total Public Debt (Intragovernmental Holdings combined with Debt Held by the Public) each year. For example you can say all we ‘really’ owe to Social Security is the amount of principal above a TF ratio of 100 plus the costs of servicing the remaining reserve, or $1.8 tn out of $2.5 trillion plus interest on the total.

And it would seem that the same applies to the world economy. How much of that $8.5 trillion are we actually on the hook for? Certainly we owe interest on the whole amount, but realistically how much on net will EVER get redeemed even under ideal economic conditions?

This is not a rhetorical question to which I will spring some nifty answer under the fold, this post doesn’t have a ‘read more’. Anyone care to kick this one around?

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Why China may have slowed Treasury purchases

by Bruce Webb

There has been a scattering of stories about how China has slowed or stopped buying U.S. Treasuries. This story offers a possible explanation

LA Times: China’s investments in U.S. up sharply

Beijing is using its accumulation of billions of American dollars to step up its investments around the globe. In the last year, Chinese acquisitions in the U.S. have ranged from a relatively obscure theater in Branson, Mo., to stakes in such famous brands as Coca-Cola and Johnson & Johnson.

China’s huge stockpile of dollars stems in part from Americans’ enormous purchases of relatively inexpensive Chinese manufactured goods and the significantly smaller volume of U.S. exports to the Asian country.

By recycling much of its dollar trove over the years back to the United States with the purchase of U.S. government debt, China has in effect helped Washington finance its deficits.

Now, Beijing is branching out. The country’s direct investments overseas rose 6.5% in 2009 to $43.3 billion — despite a global slump in such investments — and could jump to $60 billion this year, Chinese state media reported last week.

Formal estimates of Chinese investments in the U.S. last year, excluding bond purchases, range from $3.9 billion — a figure put out by New York research firm Dealogic — to $6.4 billion, a number that comes from Derek Scissors, a Heritage Foundation research fellow who tracks China’s global transactions

I’ll let the econoBears explain the significance here, my flip summary would be “Why rent when you can own”. It certainly doesn’t indicate that the Chinese are expecting some terrific crash in the medium term.

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Foreign exchange reserves are hot hot hot

by Rebecca

The G7 G20 Leader’s statement, number 20., regarding the IMF’s mission and governance (bold font by yours truly):

The IMF should continue to strengthen its capacity to help its members cope with financial volatility, reducing the economic disruption from sudden swings in capital flows and the perceived need for excessive reserve accumulation. As recovery takes hold, we will work together to strengthen the Fund’s ability to provide even-handed, candid and independent surveillance of the risks facing the global economy and the international financial system.

Last week I was in New York talking with Emerging Market strategists and economists. Most of them attended the IMF meetings in Istanbul, Turkey – according to them, the monster takeaway from the meetings was that the sky’s the limit in terms of FX reserve accumulation (in EM economies). Put this way, the IMF is unlikely to be successful in its aforementioned goal of preventing the “need” of excess reserves, at least over the near term.

Key markets in Asia (China, or South Korea) and Latin America (Brazil) remained rather resilient to the credit crunch late in 2008 due to sufficient (even excessive) reserves holdings. Brazil, for example, was able to supply private-sector financing needs by draining FX ($USD) reserve holdings. South Korea and other Asian economies, too.

The chart below illustrates reserve holdings across key countries in LATAM (Latin America) and Asia – notice the sharp drop at the end of 2008.


It’s an incredulous thought: that policy makers in EM countries – whether the reserve accumulation was for precautionary reasons (LATAM) or stemming from export-led growth (Asia) – won’t be filling the reserve coffers at increasing rates; the process is already underway.

Reserves in Brazil are now 230% higher than they were in 2007 (January), 197% in China, 190% in Thailand, and 163% in Hong Kong. Hong Kong is interesting; amid their strict dollar peg, the Hong Kong Monetary Authority is accumulating reserves faster than most countries (Hong Kong will be the country to watch as the peg against the dollar is sure to result in some inflationary pressures, given that Hong Kong’s economic fundamentals are stronger than those in the US at this time – another post).

Record inflows of late into EM financial markets (bonds and equities) are providing plenty of liquidity and contributing to reserve accumulation of late. However, having sufficient FX reserves has proven to be the best insurance out there against a stoppage in external financing. And as long as inflation pressures remain muted, acquiring reserves is not too costly economically (there are administrative costs, though, from sterilization when US Treasury rates are near zero).

The Treasury recently released the Semiannual Report on International Economic and Exchange Rate Policies; it states that officially no foreign central bank has explicitly manipulated their currency since 1994 but pointed the finger at China for their currency policies that inhibit the unwinding of global current account imbalances. An excerpt from page 3:

Although China’s overall policies played an important role in anchoring the global economy in 2009 and promoting a reduction in its current account surplus, the recent lack of flexibility of the renminbi exchange rate and China’s renewed accumulation of foreign exchange reserves risk unwinding some of the progress made in reducing imbalances as stimulus policies are eventually withdrawn and demand by China’s trading partners recovers.

It’s farcical to think that the G7 can browbeat EM countries into curtailing excessive reserve accumulation. To be sure, export growth is simply not going to grow China at rates sufficient to maintain jobs growth (9% or so) and reserve balances are likely to be increasingly focused inward domestically (supporting the financial system, local governments, etc.). However, what seems to be very real is that targeted reserve accumulation, in whatever currency but still heavily weighted in $US, buffered EM countries from catastrophe and is not going away.

Rebecca Wilder

P.S. for those of you who want to know a bit more about reserve accumulation in China, Brookings wrote a nice topical piece earlier this year.

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