In April 2005, foreigners purchased a net total of 47.4 billion dollars of long-term US Securities. This data is best viewed in comparison to the US trade deficit, which was 58 billion dollars last month, and 57 billion in April. Put another way, the US came up 9.6 billion dollars short in funding its trade deficit in April.
More importantly, it appears some Asian central banks are slowly halting their total amounts held of US Debt. In June 2004, Japan held 666.6 billion in US debt compared to 685 billion in April 2005. That comes out to a net annual increase of 18.4 billion. Over the same period, China increased its holdings of US debt from 194 to 230 billion for a net increase of 36 billion. Korea increased its holdings from 44.5 to 55.9 for a net increase of 11.4 billion. The combined annual increase for these three countries is 65.8 billion, which would finance roughly 1 ¼ months of the US trade deficit.
Most of these countries are most likely purchasing treasuries in transactions called duration swaps rather than accumulating an increasing position of US securities. A duration swap is a method of managing a fixed-income portfolio in a manner that attempts to neutralize interest rate risk. This is s hunch based on personal experience and has no basis in fact.
Earlier this year, the Asian banks announced the formation of the Bellagio Group, a group that comprises most of the US’s large Asian creditors. The group was publicly called a “study group”, but many analysts believe a desire to diversify Asian central bank assets away from the dollar was the real reason for this group’s formation. Since this announcement, several countries have increased their currency swap arrangements, indicating they may be increasing preparedness in case of a currency crunch. The increasing amount of central bank currency swaps adds further strength to the analyst’s opinion about the real underlying reason for this group.
As this is the second month of decreasing foreign purchases (last month was 40.6 billion total) it is now increasingly likely that foreign banks are growing tired of their role as financiers of the US’ spending habits.