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Treasury demand: QE trumps China [ClearOnMoney]
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Treasury demand: QE trumps China

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Commentary

Treasury demand: QE trumps China

11 Apr 2012 by Jim Fickett.

Today the IMF released chapters 3 and 4 of the spring Global Financial Stability Review. Chapter 3 is a broad study of the supply and demand for safe assets. They worry about a supply/demand imbalance that is getting worse:

heightened uncertainty, regulatory reforms, and crisis-related responses by central banks are driving up demand. On the supply side, the number of sovereigns whose debt is considered safe has fallen, which could remove some $9 trillion from the supply of safe assets by 2016, or roughly 16 percent of the projected total. Private sector production of safe assets has also declined as poor securitization in the United States has tainted these securities, while some new regulations may impair the ease with which the private sector can produce safe assets.

One detail I found interesting (not new, but I hadn't seen it so clearly presented before) was an overview of who holds US treasuries. The Fed's QE program has been so aggressive that now the Fed holds 18% of all US marketable sovereign debt, which is between 1/3 and 1/2 of what is held overseas. This means the rumblings that surface once a month when the Treasury International Capital report comes out, about whether Chinese demand is softening, are quite irrelevant, at least for now. The growth in the Fed's balance sheet has, among other things, assured that no matter what the Chinese do or say, demand for Treasuries remains robust.

(Chart courtesy of IMF; click for larger image.)