Friday, April 16, 2010

Zombie Finance Update — Foreign Banks Still Finance US Deficit

April , 2010
David Goldman

Net foreign purchases of US Treasury securities during February totalled $48 billion, slightly below the $60 billion average of the preceding three months. Foreign official agencies only bought $1.2 billion of the total. The rest was private, and overwhelmingly banks and hedge funds financing Treasury notes with cheap short-term money.

It is very strange that foreigners have been net sellers of US corporate bonds every month since last June. The sales have been small, summing to just $80 billion over ten months, but steady. Given that the US corporate market has rallied sharply, this is a counterintuitive result. I broke the story some months ago that Chinese banks were divesting themselves of US mortgage-backed securities not directly backed by federal agencies, not surprising given the partial recovery of the private-label market, and this may explain the negative numbers.

The financing of the US deficit by foreign banks through the carry trade is a remarkable phenomenon, reminiscent of Japan during the 1990s. As long as the Fed can keep this going an actual economic downturn is unlikely (I have never predicted one) but it suggests an anemic economy as far as the eye can see.

US banks purchases of Treasuries have been limited during the past few months, rising about $50 billion between November and March.

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