Summary of Key Points
After the ceasefire between the United States and Iran in April, the easing of tensions in the Middle East reduced market fears of risk aversion. However, the blockade of the Strait of Hormuz led to increased oil prices, resulting in a pattern in U.S. financial markets where stocks rose, U.S. Treasury yields increased, and the dollar index declined. There were concerns that foreign capital would sell U.S. assets, leading to a decrease in capital inflows. However, data from the Treasury International Capital Flows (TIC) report shows that: foreign investors not only did not sell but actually netted an increase in their holdings of U.S. securities; the decrease in capital inflows was due to U.S. investors buying more foreign assets and banks reducing their external liabilities. Additionally, global dollar reserves continued to rise. Although Chinese investors' balance of U.S. Treasuries reached a new low, this was actually a net increase (the decrease in balance was due to valuation effects), with an overall slight increase in their holdings of U.S. securities.
I. Market Background in April: Stocks Rose, Oil Prices Increased, and U.S. Treasury Yields Rose
With the ceasefire between the U.S. and Iran in April, there were no more conflicts in the Middle East, which alleviated market fears of risk aversion. However, the dual blockade of the Strait of Hormuz prevented oil exports, causing oil prices to rise by 16% (the average price of Brent crude was $120.8 per barrel). This directly led to:
- A rebound in U.S. stocks: The S&P 500 index rose by 10.4%, reaching a new historical high.
- Increase in U.S. Treasury yields: Although the Federal Reserve did not raise interest rates, rising oil prices pushed up inflation, causing the yields on 2-year and 10-year Treasuries to increase by 9 and 10 basis points respectively (in other words, the price of U.S. Treasuries fell).
- Decline in the dollar index: With reduced demand for safe-haven assets, the dollar dropped by 1.8% from its high levels.
II. Foreign Investors Did Not Sell U.S. Assets! The Decrease in Capital Inflows Was Due to These Two Reasons
There were predictions that foreign investors selling U.S. assets would cause the dollar to fall and reduce capital inflows, but TIC data refuted these claims:
1. Foreign investors actually netted an increase in holdings: In April, foreign investors bought $206 billion more in long-term U.S. securities compared to March, and they also purchased an additional $1.1 billion in short-term Treasuries.
2. The decrease in capital inflows was due to U.S. investors and banks:
- U.S. investors bought $87 billion more in foreign securities (equivalent to capital flowing out of the United States).
- Banks' external liabilities decreased by $147.7 billion (equivalent to some foreign funds withdrawing from U.S. banks).
Therefore, it was not foreign investors selling that caused the decrease in capital inflows; rather, it was U.S. investors investing abroad and banks reducing their liabilities that led to this outcome.
III. What Types of U.S. Assets Did Foreign Investors Buy?
Foreign investors held four types of long-term U.S. assets, all of which increased in April, but for different reasons:
- Stocks: accounting for 61.5% of total holdings, with an increase of $2.03 trillion (almost entirely due to the rise in U.S. stock prices—the valuation effect meant that foreign investors actually only bought $98.3 billion).
- Long-term Treasuries: accounting for 20.8% of holdings, with an increase of $17.6 billion (foreign investors bought $50.5 billion, but the decline in Treasury prices offset some of this gain).
- Corporate bonds: accounting for 13.9% of holdings, with an increase of $49.4 billion (foreign investors bought $20.7 billion, and the rise in bond prices contributed to this increase).
- Government agency bonds: accounting for 3.8% of holdings, with an increase of $14.1 billion (foreign investors bought $26.6 billion, but the decline in bond prices partially offset this gain).
In summary, as U.S. stocks rose significantly, the value of foreign investors' stock holdings increased. Although they bought more Treasuries, the decline in their price meant that the overall increase was not substantial.
IV. Global Dollar Reserves Are Still Rising, and Official Foreign Investors Are Also Buying
In April, official foreign investors (such as central banks) resumed buying U.S. assets, leading to a global increase in dollar reserves by $238.2 billion:
- Stocks contributed the most: with an increase of $239.4 billion (mainly due to the valuation effect of rising U.S. stock prices).
- Treasuries only increased by $2.6 billion: Officials bought $28.3 billion, but the decline in Treasury prices offset most of this gain.
- Institutional bonds decreased slightly: Officials sold $1.5 billion.
It is important to note that there may be discrepancies between different statistical sources (such as TIC and IMF data), but overall, dollar reserves are still on the rise.
V. China's Balance of U.S. Treasuries Reached a New Low? The Truth Is a Net Increase
When markets saw that China's balance of U.S. Treasuries dropped to $651.1 billion (the lowest since 2008), there was concern. However, the reality is:
1. It was not a sale; it was due to valuation effects: In April, China netted an increase of $2.2 billion in U.S. Treasuries (buying $5.5 billion in long-term Treasuries and selling $3.4 billion in short-term Treasuries), but the decline in Treasury prices resulted in a decrease of $1.2 billion in their holdings.
2. Overall, China increased its holdings of U.S. securities: The total balance of China's long-term U.S. securities rose by $32.5 billion (mainly due to the valuation effect of rising U.S. stock prices; in reality, they only bought an additional $400 million in stocks).
3. Prudent approach: When U.S. stocks reached new highs, China purchased only a small amount of additional stocks and did not overreact to the market gains.
In conclusion, the capital flow data for April debunked the rumor that foreign investors were selling U.S. assets. Instead, it was U.S. investors investing abroad and banks reducing their liabilities that led to a decrease in capital inflows. Rising oil prices pushed up inflation, causing U.S. Treasury yields to rise, while rising U.S. stock prices increased the value of foreign investors' stock holdings. China's situation also illustrates that when looking at asset balances, one should not be misled by surface figures; the valuation effect must be considered. When analyzing financial data, it is essential to delve beyond the numbers and understand the underlying reasons.