Treasury International Capital Hit the Record High Since January

By TJ Kim

September 19, 2012

Yesterday, the U.S. Department of the Treasury released Treasury International Capital (TIC) data for July. The net TIC flows totaled at $73.7 billions, a significant leap from June’s at $16.7 billions. The result hit the highest level of foreign buying of U.S. Treasury bonds and notes since January.

Behind July’s steep increase in foreign holdings of U.S. Treasury securities, there were two major situations. First, investors in the Euro-zone were seeking a safe haven amid the crisis. Secondly, Japan and Switzerland had been buying U.S. Treasury securities to protect their currencies against appreciation. Mr. Talley and Mr. Barkley wrote in The Wall Street Journal,

“Meanwhile, Japan boosted its Treasury holdings by $7 billion to $1.117 trillion in July from $1.110 trillion in June. While China’s holdings have fallen by around $165 billion in the past 12 months, Japan has boosted its portfolio by roughly $232 billion in the same period. The buying of dollar-based assets has come as Japan defends the yen against appreciation that could damage its economy. Japan has indicated it may intervene again in currency markets after the Federal Reserve’s decision last week to take further monetary-easing measures put pressure on the yen.”

However, one thing to keep in mind is that the large volume purchases happened during the month of July when the Treasury yields hit record low. In September, with the recent announcement from the FOMC on the QE3, the yields started to soar, now at close to 1.8%. Therefore, it may be very unlikely to see a huge increment in the next TIC data release.

At the onset of the QE3, the opportunity cost of investing in fixed-income assets are rising, as equity markets started to rally in hopes that liquidity provided by the Fed and low borrowing costs may soon increase corporate activities. The 10-yr U.S. Treasury is now 1.79%.

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