June 2010 U.S. Treasury Statement and May TIC Flows: Foreign Investors Still Sending Cash

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Federal outlays of $319.5 billion and receipts of $251.0 billion added another $68.4 billion to the federal budget deficit in June…

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…bumping the cumulative deficit to just over $1 trillion during the first nine months of the fiscal year. At the current rate, the deficit will total $1.3 trillion by September 30 (the end of the fiscal year), although the Obama administration predicts a shortfall closer to $1.6 trillion. Interestingly, the Treasury’s June deficit figures do not include $142.5 billion in “excess” borrowing (i.e., above that needed to close the outlay-receipt gap). Fiscal year-to-date, the U.S. government has borrowed $290 billion more than needed to close the gap; and $1.5 trillion since FY2007.

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The deficit is having predictable impacts on the total federal government debt held by the public. The debt totaled $12.8 trillion at the end of 1Q2010, or nearly 88 percent of gross domestic product.

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As mentioned above, the shortfall between receipts and outlays has to be made up from somewhere, and borrowing from overseas is a common occurrence. So, how are we doing on that score? According to the Treasury International Capital (TIC) accounting system, foreign inflows have been averaging around $19 billion per month over the three months through May -- well off the $70 billion per month that was common between January 2002 and August 2007 (the date of the first financial scare).

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The three-month average of foreign inflows into short-term securities appear ready to turn positive for the first time since May 2009, despite near-zero yields…

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…while it remains to be seen whether the recent dip in long-term public debt instruments represents a tipping point or just a breather that will subsequently push higher.

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Although net TIC inflows were nearly flat in May, several countries adjusted their Treasury security holdings. China, Japan, OPEC countries and Brazil all trimmed their holdings, while the United Kingdom, the Caribbean banks and the rest of the world added to theirs.

For now, at least, it appears there is sufficient foreign demand for U.S. paper that public and private borrowing costs will remain fairly tame. That could change unexpectedly, however, particularly if other countries follow China’s lead and also downgrade the U.S.’s creditworthiness.