November 17, 2005
SHOW ME THE MONEY
Yesterday's Treasury release of international capital flows for September was a warning sign that foreigners may be losing their appetite for U.S. government bonds. But if such data is inherently frightening, you wouldn't know it by watching Treasuries of late. Indeed, the 10-year Treasury bond's yield in late-morning trading today was 4.47%, down from nearly 4.7% back on November 4.
Yesterday's tame inflation report via consumer prices for October is the latest catalyst for convincing bond traders that erring on the side of the bulls is once again the only game in town. It's unclear if foreigners will continue to share in that brand of optimism, as they have in the past. But there's new reason to wonder, judging by the recent trend in international capital flows as it relates to U.S. securities.
Net foreign purchases of Treasury bonds dropped 14.9% to $247.5 billion this year through September vs. the same period for 2004. In sharp contrast, net foreign purchases of corporate bonds in the first nine months of 2005 jumped 24.4% to $277.0 billion over the same stretch last year.
In search of reasons why the foreigners seem to be developing a taste for U.S. corporates over Treasuries there's at least one clue worth considering. Indeed, while America's trade and fiscal accounting ledgers continue to run red with deficits, corporate America is moving in the opposite financial direction, namely, toward enhanced cash on the balance sheet.
For evidence, dive into the Federal Reserve's latest quarterly Flow of Funds report, a dry and tedious document of endless numbers but a revealing one just the same. One revelation comes in Table L.102, which measures assets in nonfarm nonfinancial corporate businesses. In the second quarter of 2005 (the latest data available), the sector's financial assets (which includes a range of cash and cash-equivalent holdings) rose 4.8% over 2004's second quarter.
That's hardly surprising if you also read Table F.102 in Flow of Funds, which states that profits for nonfarm nonfinancial corporations soared 51.7% in this year's second quarter over the year-earlier period.
Indeed, many a pundit has noted that corporations are banking a relatively high share of their profits these days. That may not be the smartest strategy for long-term growth, but it sure goes a long way in convincing buyers of corporate debt securities that the bonds are secure.
That compares with the United States government, which looks set to go begging for more loans for as far as the eye can see to fund its budget deficit, all the while struggling to manage a large and growing trade deficit.
Comparing the balance sheets of corporate America with the U.S. government is a study in contrast. Foreigners seem to be picking up on the numbers. Will the inclination spread to trading in the 10 year Treasury?
Posted by jp at November 17, 2005 11:50 AM
Corporate vs. Treasury......regardless of the improved "Current Ratio's" that corporate American seems to be experiencing, a couple of observations:
1. "Cash or Credit?"....notwithstanding the improved cash position of corporate America, it still pales in comparison to the the U.S. Governments' ultimate source for both debt service and debt repayment - "the ability to tax it's citizens.
2. "Foreign Debt Acquisition".....maybe if we were to incorporate U.S. Treasury debt acquisition by our foreign trading partners into the calculation of the "Trade Deficit" the issue would be more accurately represented.
Posted by: D Wiersma at November 18, 2005 8:58 AM