The Treasury’s latest measure of international capital flows failed to match the optimism in economists’ forecasting charts.
Foreign demand for long-term Treasuries was just $15.3 billion in July, a quarter of what analysts were expecting. Total figures including short-term securities showed an outflow of $97.5 in the month versus -$56.8 billion in June.
“An optimist might note that long-term U.S. securities purchases by foreigners in July were better than two of the prior four months, but beyond that silver lining there wasn't much to cheer about in the latest TIC Flow report,” said Eric Lascelles, chief rates and economics strategist at TD Securities.
Lascelles noted the total outflow figure was the “worst outcome since January,” and downward revisions to the prior month’s data only poured salt into the fresh wound.
Appetite for Treasuries was still robust among the United States’ two biggest clients. China increased its holdings by $24.1 billion in July and Japan absorbed $12.7 billion.
Equities were also strong among foreign purchasers, but overseas demand for corporate bonds and agency debt was reduced.
The shift from debt to equities probably reflects “a shift in mentality” as economic data pointed to stabilization and the world began to look brighter, Lascelles added, who said the trend likely persisted into August.
“The overall report itself is clearly U.S. dollar negative and bond bearish” he added, “though we always hesitate to overstate the importance of these figures given the lags involved.”
For equity markets, that may be good news in the short-term, but the Federal Reserve will have difficulty unwinding its program of quantitative easing if demand for Treasuries doesn't rebound.