Buyers and Sellers of US Treasuries

Foreign Central Banks have sold a very large amount of US Treasury securities in November 2008. The selling of US Treasuries by foreigners has reached $23 Billion in that month, the largest outflow since January '78:

Who are selling and who are buying the US Treasuries? US TIC data shows the trends:

In the last 12 months,

• China has bought over $200 B of US Treasuries, increasing its inventory by 45%.
• UK has also bought over $200 B; this represents a doubling of their inventory.
• Inventory has also doubled in off-shore banking centers that added $100B.
• Oil exporters and Russia account for another $100 B increase.
• Japan has kept its inventory nearly the same over this period.

Those who reduced their inventory in November 2008 are: Japan, Brazil, Russia, Korea, Luxembourg. I guess Luxembourg’s action must be at least partly related to unwind of structured transactions that include Treasuries in them.


Pricing Review:
The following chart shows the yield of 10Y US Treasury note. After spending most of 2008 in the range of 3.5 – 4.0% yield, its yield suddenly started dropping in mid November 2008, pretty much straight until 2% at the year end.


The foreign central bank purchases cannot explain the move of this magnitude! It is not a result of diminishing supply either as late 2008 was a period of increasing supply of US Treasury debt. This rally stemmed from the purchases by private sector: Banks were trying to reshape their balance sheet by moving from risky assets to US government debt (I would never call them risk-free!) in order to present a soothing balance sheet by the year-end.


Future Trend:
Given the fast drop in oil prices, we should not expect more buying of US Treasuries by oil exporters that we saw in 2007. Don’t know why UK doubled their US Treasury inventory, but it shouldn’t be easy for them to repeat this as they are a spender. Amid the increasing signs of discomfort with US debt by Chinese officials, Chinese buying of US Treasuries is already slowing down. Yves at naked capitalism discusses this issue pointing out that Chinese kept buying US Treasuries to prevent RMB appreciating too much against $. (Append: Later, though, she concurs with Brad Setser who claims China will keep buying US Treasuries as the reduction in their exports will be smaller than the reductions in their imports).

It is hard to see the foreigners buying more US Treasuries in 2009. Of course, we have a big buyer right here in US that plans to buy whatever US Treasury must sell. Fed!