Asia Slump: Has Capital Been Flowing Back to the US?

Part of the bond vigilante dynamic has been contributed by the growing risk aversion of foreigners in holding US assets. 

Last weekend I pointed out of the record selling of US treasuries by foreigners last June. But it seems that foreigners also sold US stocks and refrained from buying other US assets such as corporate debt and agency bonds.

More stunning detailed international capital flow data from Dr Ed Yardeni:

The US Treasury released data last Thursday tracking international capital flows for the US through June. The outflows out of US securities was shocking. Especially troubling was the amount of US Treasuries sold by foreigners. Their outflows exceeded those from US bond funds. Of course, some of the outflows from the bond funds could be attributable to foreign investors. Nevertheless, the data suggest that foreign investors may have been more spooked by the Fed’s tapering talk in May and June than domestic investors.

As the US federal deficits have swelled, the US government has become more dependent on the kindness of strangers. Apparently, they are losing their interest in helping us out with our debts. Consider the following TIC data:

(1) Total securities. During June, foreigners sold $934.1 billion (annualized) in US Treasury bills, notes, and bonds; Agency bonds; corporate bonds; and US equities (Fig. 1). Over the past three months, the annualized net capital outflows from these securities was $462.8 billion (Fig. 2).

(2) Treasury notes & bonds. During June, the net outflows from US Treasury notes and bonds was $489.2 billion (annualized). The annualized rate out of these securities over the past three months was $271.1 billion.

(3) US equities. Over the past three months through June, foreigners have also been net sellers of US equities totaling $97.1 billion at an annual rate.

(4) Agency & corporate bonds. Foreigners haven’t been selling US Agency and corporate bonds, but they haven’t been buying them either.

While it may be true that Japanese investors may have reversed coursed and bought US treasuries in early August, this may (or may not) be an isolated event. 

However coming across an article suggesting the opposite “Capital Flows Back to U.S. as Markets Slump Across Asia”…makes me scratch my head. 

The ongoing UST meltdown, whose percentage change seem to signify a 5 or more sigma (fat tailed) event, appears to have diffused into the US stock markets (Dow Industrials INDU S&P 500 SPX, Nasdaq IXIC)

The signals from the markets hardly supports of the view that capital flows have been turning net positive for the US even as Asia slumps. 

Perhaps people are turning more into holding cash and gold.