Friday, June 17, 2016

What Is Behind The Record Sale Of $75 Billion In US Treasuries By "Foreign" Holders

Lost in the noise surrounding today's dramatic Fed rate decision and Yellen press conference, was the latest TIC data which earlier today revealed something unexpected: during the month of April, when stocks were soaring, foreign official and private entities sold out of virtually all asset classes, including sales of $2.8 billion in stocks (following a $16.5 billion sale the month prior) and $20.9 billion in corporate bonds, offset by $29.5 billion in agency purchases.

But it was happened with Treasury transactions that was the most notable: dumping $74.6 billion, foreigners sold the most on record in the month of April according to Treasury Internatioanl Capital, or TIC, data.

Or rather "foreigners."  Because as SMRA adds, based on the transactions data, the major seller of Treasuries in April by far was the Cayman Islands, with net sales of notes and bonds of $47.1 billion. When we add bills, investors in the Caymans were sellers of $51.5 billion of Treasuries in April.

And here's the twist:Cayman Islands is basically how TIC data defines hedge funds, most of which have an offshore domicile for tax purpose at this location.
As Stone McCarthy adds, over the last few years, a big gap has emerged between the change in Treasury holdings by investors in the Caymans and activity implied by the transactions data.

The holdings data for April showed a relatively small decline in Treasury holdings by investors in the Caymans of $6.5 billion. The holdings data show investors in the Caymans increasing their Treasury holdings by a cumulative $136.1 billion since December of 2011, when Treasury began reporting foreign holdings of securities on a monthly basis.  Meanwhile, the transactions data imply a cumulative reduction in holdings of $139.9 billion over the same time period, a $276.0 billion discrepancy.
According to economists at the Federal Reserve, the divergence between the transactions and holdings data for the Cayman Islands may reflect increasing short sales of Treasuries by entities located there, which may in turn be related to growing securities lending demands. Short sales would be reflected in the TIC transactions data, but the TIC holdings data don't reflect short positions or borrowed securities.
In other words, in April - just as yields were rising again on hopes of another inflationary spike - hedge funds were rushing to short Treasurys. Alas, with the 10Y tumbling to 2016 - and soon record - lows, expect all these tens of billions in "discrepant" positions to be promptly unwound as numerous entities are forced to cover their shorts, in the process sending yields even lower across the cruve, perhaps to new all time lows.

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