TIC data a wake-up call for Treasury

The Treasury TIC showed a huge net outflow in July and one of the lowest monthly increases in long-term flows in years. The flows were much lower than expected in survey data. The data is clear. Foreign investors did not want to be buyers of US assets. This sent a clear wake-up call to the Fed and Treasury that the financiers of the US debt were willing to walk away from the dollar. Only after action was taken or signalled did we see a rally in the dollar. There should be a rebound in the data with the dollar rally but it suggests that it the US financing position may be much riskier than what some have believed. Global investors are sensitive to credit risk and financing and hey will look for other choices. The credit crisis has shown that even a reserve currency can be subject to change.

We have argued that the recent dollar rally has been associated somewhat with a flight to quality toward the dollar but that is under the assumption that the risk free assets which are being used to park the reserve funds are high quality.