The July TIC Data: In for the Long Term?

The July international capital flows data released today reveals a couple of key trends and vulnerabilities—most significantly that foreign investors are still buying long-term Treasuries. In fact Chinese demand for U.S. Treasuries has kept pace with the record new issuance. Yet, given the new supply , the willingness of foreign and domestic investors to buy U.S. assets might pose challenges ahead.

Although net foreign inflows to the U.S. (both short- and long-term flows) were negative (US$97.5 billion), purchases of U.S. long-term assets rose in July. The good news is that the US$44 billion net increase in long-term U.S. securities was somewhat below the purchases in June (US$125 billion) but if continued, should be about enough to cover the U.S. current account deficit.

In fact, the narrower current account deficit (US$95 billion in Q2, the lowest since 2001), implies that while the U.S. government has a lot more debt, it is less reliant in relative terms on foreign demand for the debt as domestic savings rise. Even as foreign holdings of U.S. Treasuries climbed by over US$700 billion in the last year, their share of total outstanding U.S. Treasuries has fallen from about 55% in August 2008 to about 50% in July 2009 (pending revisions when the survey data is released.) Of course, even 50%—or US$3.4 trillion according to U.S. Treasury data —is still a large debt position.