Despite the turmoil in the US financial markets, foreign demand for US securities remain robust, particularly since the Treasury’s International Capital flow report was for September, the month that Lehman collapsed.
TIC Report Explains Dollar Rally
Demand was particularly strong for US Treasuries and equities but foreigners dumped corporate bonds on the fear of default risk. As a testament to China’s rising economic power, they have now surpassed Japan as the largest holder of US debt. In September, increased repatriation led to a net sale of US securities by the Japanese while China accumulated a growing amount of US securities for the third consecutive month. The increase in foreign holdings of US debt helps to explains the dollar’s recent rally because despite higher issuance, demand for US Treasuries remains voracious.
Top 5 Owners of US Treasury Securities
Watch out for Paulson and Bernanke
The strong TIC report and the positive news from the tech sector is helping to fuel a recovery in Dow futures, which is driving the US dollar and Japanese Yen lower. We could see a recovery in carry trades today as long as Bernanke and Paulson don’t rain on the party when they testify on the government’s implementation of the $700B bailout plan before the House Financial Services Committee. This is a big risk since Paulson indicated yesterday that he will be leaving the clean up job for the new Administration. He does not plan on requesting the second half of the $700B bailout plan to leave firepower for Obama’s team. If Paulson continues to wash his hands of this mess, the market may begin to sell off once again, driving carry trades lower on the fear that nothing new will be implemented until Obama takes office. With 8 weeks to go before Bush leaves office, the current Administration is more focused on wrapping things up than starting new initiatives.
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