TIC Data Provides Interesting Trends

The US Treasury International Capital TIC System provides information on the purchase and sale of US long-term securities between US residents and counterparties outside of the United States. http://www.ustreas.gov/tic/. TIC data provides useful data on gross and net transaction across borders over a number of different security classifications. Unfortunately, this data is not useful for providing good forecasts of the direction of the dollar; nonetheless, a review of the data provides important historical information and a detailed picture of US capital flows around the globe.

The TIC data released Monday for the month of February shows monthly net capital flows of $94.5 billion. In the context of moving averages, this is lowest three month period of net purchases by foreigners since August of 2005 and matches the dollar decline since the beginning of the year. The private net transactions have fallen significantly. However, the official net purchases are the highest since the middle of 2004.

The differences in the mix does provide information on foreigner investor preferences. For example, there has been a strong preference for corporate bonds. Investors have been chasing yield even with spreads tight. This is even the case for official net purchases. There is a growing preference for corporate bonds and until recently, a significant increase in the purchase of equity.

There is also marked differences in the mix of net securities purchased by region. The mix is tilted more toward corporate bonds and equities for Europe and those locations that domicile hedge funds. Asia and Latin America as well as the oil exporters have a much more conservative purchase pattern.

Perhaps the most important take away from the data is the increase in official net purchases relative to private flows. The decline in private flows which may be more sensitive to expected returns should be a concern. A declining trend means that investors are not expecting returns high enough to move capital into the United States. This backing away from dollar investments will place more downward pressure on the dollar.