Chillin' out till it needs to be funded
US Treasuries are much in demand. Despite news flow apparently discouraging retail viewers, the 10 year Treasuries yield has been moving south rapidly, testing short portfolios at PIMCO and others as Fidelity presumably laughs all the way to the bank. US 10-Y Tees (and no not route 10 in Morristown or in Wisconsin) have moved south to 2.9% and 5-Y correspondingly lower as the yield curve gets distorted but US remains investment worthy since May.
On the other hand Capital Flows to the US turned negative, falling $130 bln month on month from May to report outflows of $ 67 bln and all this even as China added another 0.07% or $7.3 bln to its US treasury portfolio at $1.1 Tln. Of course the two should have different results, but with 2 weeks to go, probably the greatest speculation opportunities are in US treasuries and so the great move to buy $38bln of Treasuries in May, China taking a neat 20% of that.
While Investment Returns in the US have definitely been muted since MBS trading stopped in 2007-08, Investors have been shopping in the US esp as US Institutions stayed investing at home and a lot of International interest wanted to ride the restructuring in the US since recession struck in December 2007. Monthly inflows led by investment in financial instruments was as high as $140 bln every month in the US in 2011 and FDI for 2010 totaled $80 bln.
Foreign outflows have coincided with the official end of QE2 as $1.5 tln remains iunused in the US banking system and thus the outflows will have a beneficial impact on US interest rates raising both inflation and systemic rates for Fed funds, lessening the pressure on Bernanke to float more money. However, it is unlikely to be good news in the medium term.
US trade is also unlikely to recover Capital flows back as IEA moves troop out of the system in July, However China still has a lot of investments to make in the US as it deals with a larger surplus. Seems to be an interesting battle on our hands