Bilal’s Macroscope: Are Foreign Investors Buying US Assets?

The US runs a large current account deficit, which means that it needs to attract foreign capital inflows to balance its books. This begs the question of which US assets are foreign investors exactly buying. Looking at US capital flow data, we find, somewhat surprisingly, that foreigners love US Treasuries. This comes even as US bonds suffered a large sell-off last year, the US has high inflation and many are questioning the status of the US dollar. Meanwhile, after foreign investors sold US equities last year, they are returning to buy them this year.

The data

I focus on private investor flows into the US as this better captures what profit-seeking investors are willing to buy. We use official US TIC data, which captures flows most accurately, though it comes with a lag. Therefore, we will focus on 6- and 12-month trends. Here is what the data tells us:

• US Treasuries. Foreign investors have piled into US Treasuries in recent years (Chart 1). In fact, the twelve months up to October 2022 saw the largest ever flows (as a share of GDP). The last time we saw a similar surge was the QE-fuelled period after the GFC. More recently, the pace of inflows has slowed, but the size remains large.
• US Agencies. Foreign investors have been steady buyers of government-backed US mortgages over the past five years, but the pace of inflows has slowed recently.
• US Corporate Bonds. The heyday of foreign flows into US credit was the late 1990s up to the GFC. Since then, inflows have been much weaker. It picked up in 2016, fell during COVID, and has since picked back up. But the scale remains much lower than pre-GFC.
• US Equities. Foreign investors started to move into US equities in 2019 and then really piled in through 2020/21 (Chart 4). In fact, the twelve-month flows to February 2021 were even larger than the dot-com period. Since then, foreign investors sold US equities heavily, but have started to buy US equities again this year.

Overall, by far, the largest inflows into the US are into US Treasuries. There are steady flows into US agencies and corporate bonds. Meanwhile, foreign investors are starting to buy US equities again.

What does this mean for markets? Foreign investors could be the swing variable for the US curve. Once they start to sell, then the US curve may finally start to steepen. As for the dollar, the challenge always is whether flows lead or lag the dollar and whether they are FX hedged or not. The key flow to watch here is typically equities as they’re typically FX unhedged positions. These have picked up, which should be positive for dollar, but the recent correlation between equity flows and the dollar has been weak, so we would be cautious in just using this factor alone.

Our Current Discretionary Trades

Over the past week, we added long NOK/SEK to the Macro Hive Model Portfolio. As it stands, our portfolio has returned +5.6% YTD and +51.7% since inception (+12.8% annualised) with a 2.0 Sharpe ratio. Our current positions are as follows:

DM

1. Short EUR/USD (target: 1.05; stop loss: 1.125) – read here.
2. Long NOK/SEK (target: 1.05; stop loss: 0.95) – read here.
3. Duration neutral US 2s10s steepener – read here.
4. Long 1yx1y receiver swaption with a 1yx1y pay fixed swap positions – read here.
5. Short 10Y Bund (target: 2.50%; stop loss: 2.10%) – read here.
6. Short BTP vs Bund 10-year (target: 220bp) – read here.

EM

1. China re-opening – read here.
   • Long SHCOMP (target: 3,600)
   • Receive 2Y INR OIS (target: 6.0%) – read here.
   • Short USD/COP (target: 4,100)
2. EM to rally – read here
   • Short USD/IDR 3M NDF (target: 14,000)
   • Short EUR/CZK (target: 23.25)

Recent Questions From Clients

• How long could a government shutdown last? Last time it was 35 days, but in theory, this could be many months.
• How much of the stock rally is driven by AI hype? Probably a significant proportion as the S&P rally is heavily concentrated amongst big tech. Also, note the NVIDIA rally.
• Is it time to buy GBP? Yes, at least against EUR.
• Will the Fed hike in June? It depends on the debt ceiling. If we get an agreement, then the Fed could hike in June, otherwise not.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)