November 2010 U.S. Treasury Statement and October TIC Flows

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The red ink deepened in November (the second months of U.S. fiscal year 2011) as outlays of $299.4 billion and receipts of $149.0 billion resulted in a $150.4 billion federal budget deficit.
 

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The shortfall between receipts and outlays has to be made up from somewhere, and borrowing from overseas is one of the main ways of accomplishing that. According to the Treasury International Capital (TIC) accounting system, however, net foreign inflows plunged to just $7.5 billion in October (from $80.1 billion in September), which helped pull the most recent three-month average rate down to the $38.5 billion mark. That three-month average is well below the $70 billion per month typical of the period between January 2002 and August 2007 (the date of the first financial scare).
 

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In October foreigners bought up $31.4 billion in short-term securities (e.g., Treasury bills), slightly more than offsetting the net sale of $25.5 billion in September. Thus, the three-month average net inflow remained essentially unchanged at $12.1 billion.
 

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A substantial share of the retreat in net TIC flows resulted from the sizeable drop-off in purchases of long-term paper. Purchases of long-term public debt (e.g., Treasury bonds) fell to $37.7 billion (down from $69.4 billion in September), bringing the three-month average rate to $76.2 billion. Flows into private equities fell by a more modest $3.1 billion in October, bringing the three-month average to $17.4 billion.
 

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The amount of U.S. public debt held by foreigners is homing in on $4.5 trillion. China was the largest foreign purchaser of Treasury debt in October ($23.3 billion), followed by the United Kingdom ($18.6 billion) and Japan ($12.8 billion); OPEC shed $7.6 billion.
 

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As of October, the Federal Reserve was rapidly catching up with Japan and China in terms of U.S. Treasury holdings. It held $838 billion in Treasuries at the end of October, approximately $63 billion more than a year earlier; $26 billion of that difference ($312 annualized) was picked up just between September and October. China’s holdings remained lower than a year earlier, but it too was a strong purchaser in October. The pace of Japan’s purchases was fairly stable, whereas the pace of U.K. purchases trended lower in October; most of what the U.K. has now was acquired earlier in the past year.

More recent Federal Reserve data shows it has ramped up purchases of U.S. Treasury debt since October, and held nearly $968 billion as of mid-December.