Wednesday, December 7, 2016

What Does Record US Public Treasury Demand Signify?

True economic geeks await monthly reports to glean changes taking place, in this nerds case, the macro-economic picture painted by the monthly US Treasury International Capital system or simply known as the TIC.  The TIC was updated this week to show foreign holdings of US Treasury debt, as of December, 2016.


The chart below is updated to show total US federal Treasury debt (in black boxes) as of December and snapshots of who holds how much of that debt; (1) foreigners (yellow), (2) US public (in brown) representing US banks, US pensions, US insurers, etc. plus private citizen holdings, (3) Intra-Governmental holdings (in tan) representing the Social Security "surplus" and like Congressionally mandated buying with "surplus" monies, and finally (4) the Federal Reserve (in blue).
To offer some perspective, the chart below shows the changing ownership of total US Treasury debt over time.  No, the Fed isn't about to own it all although their ownership % of mid and long term bonds is likely more like 50% while their short term note and bill holdings are miniscule.
A quick snapshot of the marketable Treasury debt below.  Noteworthy is the cessation of foreign buying at years end 2014, when the Fed also ceased net accumulating Treasury debt. 

The total issuance per period is shown in the chart below (black boxes) and who purchased/holds the bonds (columns).  The simultaneous cessation of QE and foreign purchasing in 2014 along with ebbing Intra-governmental buying is plain.

Those curious as to the nature of the deceleration and now outright selling of US Treasury debt by foreigners, the chart below outlines the growth in holdings among the BRICS ending in 2011, the subsequent growth among the financier BLICS nations (Belgium, Luxembourg, Ireland, Cayman Island, Switzerland)...and now just some random buying among the Rest of the World offsetting selling by all the above including Japan.

That leaves one source of Treasury buying, the US public.  The pace of US public purchasing has never been greater and the US public in just the past two years has purchased nearly as much Treasury debt as it did from 1950 through 2000 and more than it did through the great recession of 2008 through 2010.

If we focus on the buyers of marketable Treasury debt per period (below), the US public has been left all alone to maintain a market for new and existing (rollover) US Treasury debt.  The chart below highlights that domestic buyers have purchased 105% since year end 2014 (purchasing 100% of the net new issuance and picking up the rollover debt foreigners aren't repurchasing).Here is the point...most investors want to achieve "alpha" returns and when Treasury bonds are offering very poor returns, buyers go on strike until rates, on a risk adjusted basis, are deemed acceptable.  However, we now have a very strange situation where domestic institutional buyers (banks, pensions, insurers, etc.) deem T-bonds highly desirable and are buying at a clip never before seen.  However, foreign buyers are seeing and doing exactly the inverse.


And as the chart below shows, typically when US Public Treasury demand is anything approaching this robust, it's because institutions are more concerned about getting their money back than achieving alpha returns.  Institutions are buying Treasury's at a far faster rate than they did from '08-->'10 (a three year period) and yet there has been no market sell-off despite the shift of more than a trillion away from equities / real estate into Treasury's.  How that is possible and potential implications of that is likely something to ponder as the issuance is only going to accelerate (outlined HERE).

I wonder if the largest US institutions with the largest assets under management and greatest research teams know something you and I should?  Or maybe this is just great news that US institutions want to plow trillions into still near record low yielding assets?


The issuance of new Treasury debt, which will nearly all be marketable debt, continues ramping (chart below) and detailed HERE.  Jobs growth continues slowing (chart below showing jobs growth Fed's interest rate cycle peak to peak) against decelerating population growth and a surging elderly population HERE.
And just to bring it home for American's...US GDP change per period vs. total credit market debt owed vs. Federal debt per period.  There chart below should be setting off warning bells...obscene levels of debt creation are not resulting in higher GDP growth.
Simply put, this equation has too many variables and too few constants to be solved.
Honestly, we are off the map and although the data leads me to believe we are in grave danger as this unravels, truly no one knows.