We had a request to look at the annual change in foreign holdings of U.S. Treasury securities as an addendum to our post from last night.
It’s clear the two largest foreign creditors to the United States government are pulling the plug. Not so much dumping their trillion dollar plus stock of holdings but engaging in slow sales and definitely no more net buying.
Not good at a time when the U.S. budget deficit is exploding and set to run a trillion hole as far as the eye can see. At least, until the market has other ideas.
Also, interesting is the sharp decline in flows from the Cayman, which are the hedge funds domiciled offshore.
Expect the hole from China and Japan, and especially the central banks, to be plugged by capital flows diverted from the marginal emerging markets, and we suspect lower credit quality corporate bonds.
The U.S. government will be funded but will have to pay more — maybe much more as the price-insensitive central banks are no longer the alargest buyers but now sellers — and at the expense of the other borrowers. The classic crowding out issue.
Central banks and foreigners have accumulated almost 75 percent of the stock of marketable notes and bonds. That liquidity is/has dried up, folks. America First soon to be America Thirst?
The budget mess is also starting to get loopy. That is higher interest rates = higher interest payments = higher deficits = higher borrowing requirements = higher interest rates… Wash, rinse, repeat. Yes, Mr. Vice President, deficits do matter when they have to be financed by normal means.
The free ride is over, Edgar, and winter is coming.