TIC Reflation Rolling (Over?)

There was a lot of good stuff in the March 2021 TIC data. Given that Q1 2021 was the most solidly reflationary since the recession and GFC2, we find the same across most of its headline data. From UST buying (while bonds were, in general, selling off and yields were rising; more on this in a minute) overall to bank liabilities expanding the most in several years, that had been the overall theme for the three months of TIC up to and including March.

On the flip side, as much as the first quarter had been most evidently looser, it was also the weakest yet when compared to prior periods. Furthermore, in global bond yields, meaning money, it didn’t seem to get beyond Feb 24-25-26 leaving March as somewhat of a question. Here we also find a few interesting TIC components which offer some clues.

The bigger picture is simply this: does reflation still have legs? Upon that, the entire inflation case rests. The headline numbers don’t really tell us much beyond the facts we already know.

Or, are we already seeing signs – very familiar signs – of its premature demise, maybe even rolling over already toward what would then be the next global dollar shortage/surge (Euro$ #4b; or Euro$ #5 if you’re picky). In that circumstance, truly transitory “inflation.”

Taking the former first, contrary to established belief foreigners actually sell LT UST’s specifically and US$ assets in general when those things are in high demand. Dollar shortages across the world compel liquidation of dollar assets, thus the confusion. Tight money raises the demand for UST’s among market participants who aren’t forced into selling them. Foreigners, typically FOI’s (Foreign Official Institutions), liquidate into a market starving for these very assets.

Conversely, when dollars are less hard to come by – reflation – foreigners tend to buy these assets back even as the rest of the marketplace seems to be selling them as growth and inflation expectations rebound.

Up to now, foreign holders aren’t exactly buying more LT UST’s but they clearly have been forced to sell a whole lot less than immediately in March 2020 and the few months afterward. You can see above how the inverse correlation works; around September, less foreign selling indicating less forced UST liquidations consistent with reflationary higher yields since.

In March 2021, foreign holders went nuts in UST’s (the opposite of what they’d done in February, as noted last month). The net increase of all types of recorded US$ assets among all the various foreign holders surged by a monthly record of $208 billion.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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