Monday, September 18, 2006

Sea of liquidity recedes just a bit...

Foreigners bought about $33 billion in U.S. securities in July, down from $75 billion in June. The bond market is off about 3/8 on the news. As has been widely reported, foreigners have been buying U.S. securities like they are going out of style for the last 3-4 years, which has propped up bond market prices, corporate and MBS spreads, etc.

I've talked a lot about the amount of liquidity in the financial system, and how much the bond market has benefited. I can't take this one data point and assume that situation has changed in any substantive way. What's more concerning for U.S. investors would be if foreigners are diversifying their portfolios into other currencies. We'll just have to wait and see.

Reader Steve Feiss has made a couple comments about technical conditions in the Treasury market, which I have tried to answer in full blown posts, although I realized I didn't give him credit in the last point I wrote in response to him. Anyway, the foreign bid is the 900 billion dollar technical gorilla in the U.S. bond market. If that bid were to go away, all bets are off.

I believe in order for that to happen, we'd have to close our current account trade deficit. That's seriously unlikely. As long as we're importing goods, foreigners will have to export dollars. They have to buy SOMETHING with those dollars.

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2 comments:

steve feiss said...

I realize hindsight is 20/20 and going back to an old post may NOT be most useful ... That said, I'd just like to add that while my comments may have been more technical in nature, I am currently (as of Sep 20th, ahead of FOMC meeting) asking our clients to think back to other situations where the Treasury mkt WAS in fact justified in trading BELOW (inverted) FedFunds ... think late 80's early 90s housing downturn (bubble?) and 2000 tech bubble ... in both instances 2s/FedFunds came very close to -200bps (from current -45bps, that's some pretty good 'alpha') ... In any case, while my occassional responses have been technical in nature, there is a fundamentally bigger picture side (that supports Fed on hold and even richer Treasury mkt) that I'd love to share with you and/or any readers who'd like access to my website ...on it I gather a bunch of 'Street' research and daily news and come up with something to say to our client base (money managers, pension funds, and prop trading desks) every day which they in turn 'pay' for with transactions ... fairly straight forward set up ... let me know if interested and good luck today with FOMC!! Regs, Steve

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