Foreign demand falls for Treasuries FT --- Causality Confused

Below article is a great example of bad economics. Every bit of the commentary on this piece of news is misguided or confused. Sadly lots of people have failed to learn from those days when "financing of the US current account deficit " was the biggest worry.  Lately we have been facing the other big apprehension: What happens when China stop buying US treasuries (UST)?

And here we are up against reduced purchases of UST by the Chinese... What happens? Bond yields fell and USD rallied at a time of record US fiscal deficit. Go figure!

I wonder if this has anything to do with shrinking US current account deficit?  Hmm... Or more profoundly that Current Account ALWAYS EQUALS Capital Account under floating exchange rate regimes and that there is no such thing as financing of one with the other.  This means if there is current account deficit it is ALREADY financed. Otherwise countries run smaller or no deficits, or even surpluses as we witnesses during the recent crisis. When financing dried up Turkey had to shrink her deficit to reduce its external financing needs. Economy contracted to adjust to this new reality.

As I have been writing for a while now higher return on capital is reversing flows back into the US. This is happening at a time US's external financing needs are being reduced. Just consider that 80% of US companies reported better than expected earnings in Q4-2009. Lock and load. We are in the early days of US asset outperformance.

Published: February 16 2010 18:01
Foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday.

China sold $34.2bn in US Treasury securities during the month, the US Treasury said on Tuesday, leaving Japan as the biggest holder of US government debt with...


For China, the shedding of US debt marks a reversal that it signalled last year when it said it would begin to reduce some of its holdings. Any changes in its behaviour are politically sensitive because it is the biggest US trade partner and has helped to finance US deficits.


Alan Ruskin, a strategist at RBS Securities, said that China’s behaviour showed that it felt “saturated” with Treasury paper and that this is the sign of a trend. The change of sentiment could come at the detriment of the US dollar and the Treasury market as the US has to look to other countries for financing. Japan and the UK could pick up some of that slack and last month both added to their Treasury holdings. However, the overall monthly sell-off of $53bn was the biggest on record.

The figures come as the White House grapples with how to cut the US deficit, which is projected to be $1,560bn in 2010, or 10.6 per cent of gross domestic product. However, the move away from the safety of US debt is a sign of growing confidence in the global economy.Net purchases of long-term US securities declined to $63.3bn from $126.4bn in November, according to Treasury figures. Foreigners increased their purchases of US equities, buying $20.1bn in December after buying $9.7bn the previous month.

However, Gregory Daco, economist at IHS Global Insight, said that global appetite for US assets remained relatively solid , and that the recent turmoil in European bond markets caused by the Greek debt crisis meant the US would remain attractive even as the dollar strengthened.

“A stronger US dollar should not deter foreign investments as long as real GDP [gross domestic product] and productivity growth remain strong,” he said.

Separately on Tuesday, the National Association of Homebuilders said that confidence among builders was on the rise this month thanks to signs of healing in the labour market. Its index of confidence ticked up two points to 17 in February, as low interest rates and the extended homebuyer tax credit improved conditions for buying.

“Builders are just beginning to see the anticipated effects of the home buyer tax credit on consumer demand,” said David Crowe, NAHB’s chief economist. “Meanwhile, another source of encouragement is the improving employment market, which is key to any sustainable economic or housing recovery.”