TIC Data Shows Drastically Reduced Foreign Demand for Long-Term U.S. Assets in July

Today's TIC data showed a dramatic reversal away from foreign demand for U.S. long-term securities to short-term securities as the flight-to-quality trend began in July as investors fled the subprime arena. The weakness may also be payback from the record strength of the past couple of months.

Net long-term TIC flows for June were revised down to $97.3 billion from the originally reported very high level of $120.9 billion, and declined further in July to only $19.2 billion in net demand, the lowest level in 9 months. In contrast, the total net TIC flows, which includes T-Bills and other short term debt securities soared to $103.8 billion in July after being revised lower to $34.4 billion in June. International sales of US Treasuries were the highest in four years, and foreign demand also declined for U.S agency and corporate debt as well as stocks. All areas were hit on concern that the subprime woes would hurt asset values and cause the U.S. economy to slow. Another negative for foreign investors was the -1.8% drop in the dollar's value in July against a basket of major currencies which directly reduces the value of U.S. assets for foreign investors. The dollar's drop in July was the largest monthly decline in over a month.

By category, total purchases saw large drops from both foreign central banks as well as private investors for U.S. assets. Treasury instruments saw outright selling in both categories for a total amount sold of over $9 billion during July. All other categories saw net buying, but at much lower levels. Equities held in the best, falling to $21 billion in July from $29 billion in June, this in spite of equities falling over 3% during the month for the largest monthly decline in three years. The debt sectors both saw substantial decline. Corporate bond demand fell from $26 billion to $4 billion, while agency demand ( which includes both agency debt and MBS) fell from $40 billion to $9 billion from the prior month. In both categories, official demand fell by half, while private sector demand fell much more.

For the first time in four months, Chinese demand for U.S. Treasuries rose (+$3 billion to $408 billion). Brazil and the UK were also net buyers in July. It is thought that a lot of the UK demand is actually for the Middle East. UK holdings rose $17.5 billion to $210 billion in total. Japan, the largest foreign investor in U.S. government debt sold over $2 billion in Treasuries, to bring their total holding down to $611 billion.

Foreign demand for U.S assets in July fell below the average monthly second quarter current account deficit of $64 billion. If this continues, it could spell increasing trouble for the U.S. economy's ability to fund consumption levels over GDP output. The dollar is at risk over this news, and did in fact fall -.07, as measured by the dollar index, to 79.66, which is just above the 15 year low reached last week. A benefit is that the U.S. trade deficit seems to have stopped widening as foreign demand for U.S. goods improves.