Macro Monday 30~U.S. Net Treasury International Capital FlowsMacro Monday 30
U.S. Net Treasury International Capital Flows
In essence the U.S. Net Treasury International Capital Flows (US TIC Flows) refer to the movement of funds into or out of the United States through the purchase or sale of U.S. Treasury securities by foreign investors and governments. These flows of capital are an essential component of the overall balance of payments, reflecting the financial transactions between the United States and the rest of the world.
What does the data represent exactly?
The U.S. Treasury International Capital (TIC) system is compiled by the U.S. Department of the Treasury and provides information on cross-border financial transactions. The TIC data include details on purchases and sales of various U.S. financial assets and liabilities, such as Treasury securities, corporate bonds, equities, and banking flows.
In simple terms the Foreign Purchases of U.S. Securities (inflows) are taken away from the U.S. Purchases of Foreign Securities (outflows) to present a overall net figure. The net result of these two components determines whether there is a net inflow or outflow of capital.
What are the drivers of positive & negative flows?
Positive Flows (>0 on chart)
POSITIVE FLOWS in U.S Net Treasury International Capital result from factors such as attractive U.S. interest rates, a stable domestic economy, and global uncertainty that drives foreign investors to seek the safety of U.S. Treasury securities. During these periods, there is a net inflow of capital into the United States pressing the number higher above zero.
Negative Flows (<0 on chart)
Conversely, NEGATIVE FLOWS occur when other countries offer higher returns, there are concerns about the U.S. economic outlook, or global risk aversion prompts investors to repatriate funds. Exchange rate movements also play a role, as a stronger U.S. dollar can make U.S. assets less appealing.
The interplay of the above mentioned factors influences the direction of international capital flows, which impacts the balance of purchases and sales of U.S. Treasury securities by foreign and domestic investor.
Now that we have a general sense of what’s driving the data, and what makes an overall net positive and or net negative flow, let’s have a look at the chart.
The Chart
✅ Since Jan 2019 there has been an upward trend in Treasury Inflows into the U.S (Black Arrow).
❌This upward trend had one sudden interruption causing a decline from Mar - May 2023 going from positive inflows of $114B to negative outflows of $159.4B, the timing of which coincided with the 2023 U.S Banking Crisis where three small-to-mid size U.S. banks failed.
✅ Since the Banking Crisis in May 2023 Treasury Capital flows have moved from overall negative outflows of $159.4B to overall positive inflows of $260.2B. A major turn around and reversion to the long term trend.
✅The recent surge in positive inflows to $260.2B are the highest recorded since August 2022 ($275B)
In summary inflows to U.S Treasuries have been in an general uptrend since January 2019 with one brief interruption from Mar – May 2023 and inflows have increased significantly in recent months and look like they may be about to take out the Aug 2022 highs.
Recession Patterns
1. More isolated recessions that were not globally systemic events led to positive net inflows into the U.S. Treasury however larger global events led to outflows from U.S. Treasuries, particularly if those global events involved the U.S. engaging in foreign conflicts.
▫️ During the DotCom Crash (No. 3 on the chart) – The tech sector was badly hit but it was not necessarily a global recession with the associated geopolitical turmoil. Foreign investors sought safety in the U.S. Treasury Market during this time.
▫️ Similarly during the brief Gulf War Recession (No. 4 on the chart) you can see that initially, there was increased net inflows however in Jan 1991 inflows sharply turned to outflows which coincided with the U.S. led invasion of Kuwait (a response to Iraq’s invasion of Kuwait). This was considered a global event and thus led to an exodus of outflows and repatriation of funds from the U.S Treasury Market.
▫️ More recently during the Great Financial Crisis (no. 2 on the chart) and the COVID-19 Crash (No. 1 on the chart) there was a significant outflow from U.S. Treasuries due to the magnitude of these global events. You can imagine foreign market participants clawing funds back into their respective countries to batten the hatches and get into a defensive financial position with global systemic risks high. Better to have a bird in the hand than two in the bush when the bush is on fire.
▫️One other pattern worth mentioning is highlighted in yellow on the chart with an A, B and C. Prior to the Great Financial Crisis and COVID-19 crashes we first had a reduction in overall U.S. Net Treasuries of $373B (A on chart) and $393B (B on chart), respectively. Within 13 to 16 months of both treasure drawdowns we had a recession. We recently had a drop of $437B (C on chart) which ended in May 2023. If history repeats and we had a recession within 13-16 months of this happening, this would be sometime between June and Sept 2024. An alternative view would be that the increase in declines from $373B (A) to $393B (B) to $437B (C) may correspond with the shortening timeframes from 16 months(A) to 13 months(B) to potentially 10 months(C) for the current $437B drop (C on the chart). This would suggest March/April 2024 as a potential recession timeframe (based on the historic reductive time pattern).
The U.S. Net Treasury International Capital Flows is a fascinating chart to keep an eye on and should be added to the economic data armory as it will help us interpret what is really going on in the treasury market (there is a lot of false narratives out there ATM). It is also useful in informing us on what the global perspective is in terms of systemic risk vs isolated risk, and also from a historic recessionary standpoint offers value.
The best investors in the world call the bond market the market of truth but I have found it hard to find a chart that illustrates this through a global lens UNTIL today. This chart captures that beautifully.
Thanks for coming along again
PUKA
