GLOBAL ECONOMICS AND POLITICS

Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.


 

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RUNNING FOR COVER: FOREIGN OFFICIAL HOLDINGS OF US TREASURY SECURITIES © Leo Haviland October 13, 2016

“I know what gold does to men’s souls,” says a grizzled prospector in the movie, “The Treasure of the Sierra Madre” (John Huston, director)

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OVERVIEW AND CONCLUSION

Foreigners hold a massive quantity and substantial share of United States Treasury securities. Such foreign ownership of and trading activity in UST therefore is an important variable for US government interest rate levels and trends, which in turn intertwine with yield elevations and movements in other American debt playgrounds. And of course to some extent, and in various (and sometimes changing) fashions and degrees, given the importance of America within the global economy, UST yields interrelate with and influence yields overseas, as well as assorted currency, stock, and commodity marketplace levels and trends.

Federal Reserve Board (and other key central bank) policy, inflation trends (in America and other major nations), equity adventures (for the S+P 500 and other important advanced nation and emerging marketplace benchmarks), and the strength of the US dollar will influence decisions by current and potential overseas owners of UST. So will numerous other economic as well as political factors such as the America’s November 8, 2016 election and its aftermath.

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Many marketplace visionaries focus primarily on the grand total of foreign holdings of United States Treasury securities, ascents and descents in that sum, and that amount’s relative share of US debt outstanding. This indeed can provide observers with helpful information.

Yet in regard to UST ownership by overseas entities, the foreign official and private sectors do not necessarily behave the same way. Sometimes this distinction appears significant enough over time to monitor closely.

Thus concentrating on the grand total of foreign holdings and shifts in that statistic risk overlooking an important pattern which appeared in recent months within those holdings. What is that pattern? The net foreign official holdings have fallen not only as a percentage of overall foreign holdings, but also in absolute levels. This substantial official exodus is important.

Suppose not only that such noteworthy net UST liquidation by the foreign official sector persists, but also that the overseas private sector decides to reduce its net buying significantly, or to become a net seller. All else equal, that will help to push UST yields higher.

Selecting variables regarding as well as presenting explanations (“causes”) for marketplace and other cultural phenomena reflect the subjective viewpoint and rhetoric of the given storyteller. And marketplace history does not necessarily entirely or even partly repeat itself. Net foreign official selling (or net buying) of US Treasury securities of course is not always or the only factor relevant to American stock marketplace trends. Marketplace participants nevertheless should note that sometimes over roughly the past two decades (since 1997), substantial net foreign official selling of UST can be associated with a decline in the S+P 500.

US federal budget deficits indeed have plummeted from their pinnacles reached due to the global economic disaster. But they have not disappeared. And they probably will increase in subsequent years. So looking forward (and all else equal), if substantial net foreign selling of UST by both the foreign official and private groups exists, that will make it increasingly difficult for the American government to finance looming budget deficits. Will this eventually encourage UST yield rises? Perhaps the US public will help to fill the deficit financing gap, but it may take higher rates (better real returns) than currently exist to inspire them.

 

A DELUGE OF DEBT

“‘A Ti-tan iv Fi-nance,’ said Mr. Dooley, ‘is a man that’s got more money thin he can carry without bein’ disordherly. They’se no intoxicant in th’ wurruld, Hinnissy, like money.’” (Finley Peter Dunne’s “Mr. Dooley” commenting “On Wall Street”; spelling as in the original)

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There are various measures of US federal (national) indebtedness. Also, reports regarding breakdowns in debt ownership at times vary in their presentation. But regardless of the analytical perspective embraced, foreign ownership of UST is substantial in absolute and percentage of debt terms.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Running for Cover- Foreign Official Holdings of US Treasury Securities (10-13-16)

AFTER QE2- EASY DOES IT? (THE MONEY JUNGLE, PART THREE) © Leo Haviland, June 6, 2011

The current act of the Federal Reserve’s money printing festival ends this month. Thus a big buyer of US Treasury securities substantially disappears. Suppose Senate, House, and White House performers do not enact a significant deficit cutting package. Assume no amazing economic growth magically eliminates much of the near term or long run shortfall. Will American individuals and institutions leap at the chance to boost their acquisitions of these low yielding bills, notes, and bonds? Absent “flight to quality” fears, probably not. The same is true of overseas players.

Judging from recent foreign buying patterns of US Treasury securities, it then will be difficult to attract sufficient foreign ownership to fill America’s fiscal hole. In the absence of another round of quantitative easing, or unless the US (and worldwide) economy weakens substantially, US government interest rates will face pressure to rise.

Associated with its quantitative easing and interest rate policies, the central bank sentinels have unleashed rhetoric concerning their talent in managing the process, particularly the unwinding. When if ever, and how fast, will it disgorge its vast supply of securities? Thus Fed quantitative easing has a counterpart in qualitative easing. Fed oratory indeed strives to inspire confidence in the Fed’s monitoring skill, its determination to keep inflation expectations well-anchored, its trusty and ready-at-hand toolkit, and its ability to smoothly implement appropriate exit strategies.

FOLLOW THE LINK BELOW to download this market essay as a PDF file.

After QE2- Easy Does It? (The Money Jungle, Part Three)