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Recent official reports suggest that foriegn buyers of U.S. debt are still showing support for dollar notes and bills, despite recent claims and headlines to the contrary. There is a major question however over how things are getting reported, because something dramatic just changed.
Treasury auction bids are usually split in two, direct bids that come through primary dealers, and indirect bids that come from a foreign source that avoids the primary dealers. The split is done mainly for statistical purposes.
Usually, the market uses indirect bids to gauge foreign central banks’ interest in U.S. debt, but as TheLFB-Forex.com Trade Team notes, this view may be slanted because indirect bidders account for a large class of foreign investors, which includes foreign financial institutions, brokers and central banks.
Over the last week, indirect bidders for Treasuries surged from the long-run 25%-30%, to average close to a mind-boggling 60%, something that sent a shockwave through the financial market. It showed that foreign investors are still happy, or forced by high yields and low note valuations, to buy dollar denominated assets, but that does not tie in with recent verbiage and dollar based headlines and soundbites coming from abroad.
There is a question however from the financial press in how the Treasury now counts and records bids; those bids that have caused foreign demand for U.S. debt to appear curiously strong. At a time that China and other important holders of U.S. debt complain relentlessly about the dollar’s valuation and maintaining the U.S. credit rating, and are announcing publicly that they are looking to reduce their holdings and reserves of dollar based assets, something is not adding up.
Now, it may be that the overseas holders of U.S. debt are in a pickle regarding forward dollar valuations, and it may be a game of smoke and mirrors is being played, but the Treasury auction reports raise more questions than give answers, at a time that the Federal Reserve tries to inflate foreign demand, and when most market participants question the fate of the ever-growing U.S. deficit.
Clear-cut, reliable reporting, is what should be demanded. The credit crisis unfolded on the back of inadequate reporting standards, and a new truth needs to be laid out here, so that everybody involved in the the financial market can at least can take something from the pain of the last eighteen months; and that is something that should start at the top.
The painful truth is that the U.S. economy is running on huge debt-to-growth ratios, and the indirect financing of the administration budget is now getting reported in a new/slanted way, one that reveals a larger than realistic desire to own dollar denominated debt. The same pattern – hiding/modifying of the truth – was observed with other key economic reports, like the CPI that has huge variables when compared directly to other regional reports, or M3 money supply numbers that were deemed "too expensive to produce" by Mr Alan Greenspan, during a period when the market was looking to those reports for guidance in finding fair Usd values.
Too expensive? Currently, the Fed is one of a tiny group, and the only major central bank in the world, that does not publish the M3 numbers. Why? Is that truth too painful to know as well? Or is the American public not trustworthy enough to know what to do with the information? Something smells here, and it is not going away.
Treasury Income Capital (TIC data) numbers are released again soon, albeit two months behind the current date, (ever wondered why it takes two months, when we live in an instant world?). The numbers will show the net flow of investment into the U.S. but questions will now be raised as to that report's credibility. TIC data may just join the group of U.S. reports that are just too painful to read, or have just plain lost their credibility; CPI, Non-farm Payroll, M3 money supply, and now TIC data.
The volatility and realignment of fair value in response to these releases may continue to become irregular, but the doubt about the reporting standards is going to stay consistant; something really does not add up here.