TIC data shows decline - the demand for Tresuries will have to come from domestic buyers

The TIC report from Treasury showed a decline in foreign demand for US assets by over 145 billion. Net long-term TIC flows were negative $43 billion. This decline was much larger than expected with survey data suggesting positive net flow of $45 billion. While there was more buying of Treasuries by foreign private investor as a flight to quality, there was strong selling of corporates and agency securities. There seems to be less willingness to buy anything but the highest quality paper.

Interestingly, the dollar moved higher during January while interest rates also moved higher. The flows suggest that foreign investors are looking for higher compensation to buy US assets. If the deleveraging story was not in place, we would have expected that the dollar would have been lower on these poor numbers. Some of the decline in foreign buying has been clearly offset with the higher savings rates in the US. The fact that current account surpluses in both China and Japan the two largest buyers of Treasuries have declined suggest that these large investors do not have the same buying power.

It is hard to include this information into a model exchange rates, but the data provides a good glimpse of what key buyers are doing. The trend is what is important and the long-term TIC data shows a down direction which will have to be offset by domestic buying.