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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