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Macro Pulse highlights recent activity and events expected to affect the U.S. economy over the next 24 months. While the review is of the entire U.S. economy its particular focus is on developments affecting the Forest Products industry. Everyone with a stake in any level of the sector can benefit from
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Thursday, February 16, 2012

January 2012 U.S. Treasury Statement and Debt Overview

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Outlays of $261.7 billion and receipts of $234.3 billion added $27.4 billion to the federal budget deficit in January. The federal debt held by the public stood at $15.223 trillion at the end of December.
 
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Foreigners held $4.732 trillion, or 31 percent of the U.S. public debt at the end of December. China remained the largest foreign creditor ($1.101 trillion) despite shedding $31.9 billion (2.8 percent) of Treasuries. The U.K., often considered a proxy for China, also sold $11.1 billion (2.6 percent) in December. Japan was the biggest buyer in both absolute and percentage change terms ($3.5 billion; 0.3 percent).
 
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The Federal Reserve “stood pat” with its holdings of U.S. Treasury securities in December.
 
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Central banks controlled 68 percent of the foreign-held U.S. Treasuries, down from 72 percent a year earlier.
 
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According to the Treasury International Capital (TIC) accounting system, net flows into the United States for all types of investments amounted to $87.1 billion in December; that brought the three-month moving average to $28.9 billion.
 
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Delving into the TIC report details revealed that short-term securities experienced a net outflow of $18.3 billion (bringing the three-month moving average to -$7.1 billion).
 
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Long-term U.S. public debt saw net inflows drop to $10.6 billion (3-month average = $30.3 billion), while private equities saw net outflows of $31.7 billion (3-month average = -$13.9 billion). This begs the question: How could net TIC flows be increasing if the components were all down? The answer appears to lie with the observation that banks’ own net dollar-denominated liabilities to foreign residents increased by $103.8 billion.
 
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Foreigners seem to be wavering in their commitment to hold Treasuries with the Federal Reserve, thereby creating considerable volatility in the monthly change of custodial holdings.
 
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A substantial share of the explanation for why U.S. interest rates fell to their current low levels came from foreign investors’ willingness to buy and hold U.S. Treasuries. (Note that the monthly change axis in the graph above is inverted to better show its correlation with the 10-year Treasury rate.) Rates could rise if those investors get “cold feet” and park more of their funds in other vehicles.

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