Thursday, June 25, 2009

WSJ: Is Foreign Demand for US Treasuries as Solid as it Looks?

I found this little tidbit in the Wall Street Journal and it really shows (again) it is just business as usual, in all branches. One of the big stresses in the market has been the enormous glut of US debt coming (both new and rollover). In the past week alone the Treasury put on the market a staggering $104B of debt. Sit back and think about that for a moment... then annualize it ($104B x 52 weeks). Then sigh.

But I digress! Money is free in America as it grows on trees. Going back to the earlier point, the stress is eventually our foreign owners, err creditors will (a) demand much higher rates of return i.e. higher yields - to compensate for all the debt we are issuing and the long term risks it entails or (b) they will begin walking away. This is more an issue in the long term bonds (10 year or 30 year) rather than short term. Indeed China for example has been slowly moving their purchases away from the long term and into short term - much easier to walk away from when the day eventually comes. [May 21, 2009: NYT - Chinese Becoming More Picky About Debt]

Without getting technical, in the bond market there are direct and indirect purchases... indirect being foreign issuers. From the Federal Reserve's New York branch website

Purchases by indirect bidders, in particular, are a fairly good proxy for foreign purchases of Treasury notes, but not Treasury bills.

For those that don't know, "notes" are generally 2 years of duration or longer. "Bills" are the very short term things like 3 months, etc.

Long story short people will now obsess over the INDIRECT purchases of our longer term notes. This is expressed as a percentage; the higher the better in terms of "demand" from foreign central banks.

We've recently had some long term auctions that went reasonably well, and the indirect purchases allayed some fears. Cool right?

Err... fine print time. Follow as with all government reports - when the data begins to work against you, start to make adjustments. Banana Republic style... because folks, we can't handle the truth. We've done it for inflation, employment, GDP - we've lose entire reports like M3 (money supply)... its a pattern. As for this one? Another feather in the cap for Uncle Timmy G.
  • The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world's central banks are still willing to help absorb the avalanche of supply, mightn't be all that it seems.
  • When the government sells bonds, traders typically look at a group of buyers called indirect bidders, which includes foreign central banks, to divine overseas demand for U.S. debt. That demand has been rising recently, giving comfort to investors that foreign buyers will continue to finance the U.S.'s budget deficit.
  • But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners.
Boo Yah! If you don't like the results; change the parameters! We've been doing it for 25 years, why change now?
  • The new definitions are deep in the arcane world of Treasury auctions. The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before. Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher.
  • Getting a better sense of investors' appetite, especially overseas, is imperative to the U.S. at this time when it needs to sell record amounts of debt in order to tackle surging budget deficits and fund massive stimulus programs to revive the economy.
So what does Treasury have to say for themselves?
  • Treasury officials didn't respond to requests for comment.
I assume CNBC was all over this yesterday? In between the cheerleading? Or will report it the next time we have a bond auction that went "swimmingly well as foreigners showed up in droves".


EDIT 1:15 PM - here is a good alternative view via Across the Curve blog; essentially it states the new parameters will be more accurate than the old (sounds right) but if that is true, it implies the old way of counting direct v indirect has been very misleading. So we will have a 1x adjustment as we move from 1 style to another, which will hopefully show more accurate data but let's see how many commentators mention this change when they talk up how many more foreign buyers suddenly want our debt than 1, 3, 5 years ago! :)

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