Foreign Buyers I: Loading Up on US Treasuries & Equities.
The phrase "I have always depended on the kindness of strangers" is a famous line from Tennessee Williams' play, A Streetcar Named Desire. It's spoken by the character Blanche DuBois in the final scene as a doctor and a nurse are leading her away. The line is often interpreted in various ways, including as an expression of Blanche's naivety, her reliance on fantasy and illusion, and her desperate need for acceptance and validation.
Similarly, Uncle Sam has increasingly relied on the kindness of strangers, i.e., foreign investors, to purchase US Treasuries, helping to finance the rapidly mounting debt of the US federal government. In recent years, Doomsayers, such as Ray Dalio, have warned that we can no longer count on them to do so. A debt crisis is increasingly likely, they warn. That would cause bond yields to soar in the US. The dollar would also plummet in this scenario. The dollar bears have recently warned that global equity investors are rebalancing their portfolios out of US equities and into other major equity markets worldwide, particularly those in Europe. This has depressed the foreign exchange value of the dollar, especially relative to the euro.
The naysayers may be right eventually, but the May Treasury International Capital System (TICS) data released last Thursday by the US Treasury show that foreigners remain very kindly disposed to buying US securities. In fact, they bought these securities at a record pace over the 12 months through May! This helps to explain why the 10-year US Treasury bond yield has remained relatively subdued all year, around our target range of 4.25% to 4.75% (Fig. 1 below). That’s consistent with our view that the bond yield has normalized over the past couple of years by trading in a range like the one in the years before the Great Financial Crisis.
