Treasury International Capital Report

February 16, 2008

http://eresearch.fidelity.com/eresearch/goto/markets_sectors/landing.jhtml?bar=s

This link will take you to a calendar of economic data releases available on Fidelity.com.  Check the “Treasury International Capital Report” for February 15th.  But to make things easy, I’ve quoted the text of the report below.  I’m posting this because it’s a good illustration of the sell-off of American assets needed to finance the trade deficit.  Notice that foreign demand for U.S. bonds last month was flat.  Bond auctions have been going badly since the Fed lowered interest rates.  Although the Fed has officially cut interest rates to 3.5%, the interest on 10-year bonds has actually jumped back up to close to 3.8% to attract buyers.  And foreign purchases of U.S. stocks was strong.  That’s because foreigners have to use the dollars they’ve gotten through trade to buy one of three dollar-denominated investments:  U.S. bonds, bonds of U.S. corporations or stocks of U.S. corporations.  Either that or they have to sit on the money and earn no interest at all.  At any rate, the sell-off of American assets continues at a furious pace to finance the trade deficit.  What happens when these assets are depleted?  If changes aren’t made to balance our trade equation, we may find out and it won’t be pretty.

“Definition
These Treasury data track the flows of financial instruments into and out of the United States. Instruments tracked include Treasury securities, agency securities, corporate bonds, and corporate equities.”

“Highlights
Net foreign purchases of long-term U.S. securities rose $56.5 billion in December vs. $90.9 billion in November. December’s increase is on the low side but does match the nation’s roughly $60 billion monthly trade deficit, a match up that excludes the nation’s roughly $35 billion monthly federal deficit but still enough to limit reaction in the financial markets. Foreign demand for Treasuries and federal agency bonds was flat in December, but not demand for U.S. corporate bonds and, interestingly, U.S. equities which was very strong. By banking region, holdings of U.S. securities in China showed a solid increase, this despite talk in the markets that Chinese investment in the U.S. is slowing. In sum, the decline in the dollar has not limited foreign demand for U.S. securities, at least not yet.”

Pete


Fed Disappoints Wall Street with Small Rate Cut

December 12, 2007

The stock market plunged yesterday when the Fed announced that it was cutting interest rates by only 0.25%.  Wall street wanted a bigger cut.  In addition, the Fed gave no indication that it was inclined to drop interest rates further, adding to the stock market’s disappointment.

I wasn’t surprised.  The Fed is caught between a rock and a hard place.  It wants to lower rates to head off a recession but needs to keep rates high in order to attract foreign investment needed to off-set our staggering trade deficit. 

Don’t be surprised if the Fed disappoints next month too. 

Pete