A Forex View From Afar

The Truth Is Just Too Painful To Handle

The recent reports issued by the U.S. Treasuries showed that, despite recent claims, foreign buyers still show their interest in U.S. debt.

Treasury auction bids are usually split in two, direct and indirect bids, mainly for statistical purposes. The difference between the two is easy to understand, direct bids come through primary dealers, while indirect bids come from foreign sources, avoiding the primary dealers.

Usually, the market uses indirect bids to gauge the foreign central banks’ interest in U.S. debt, but as TheLFB-Forex.com Trade Team notes, this view may be wrong, since indirect bidders account for a large class of foreign investors, which includes foreign financial institutions, brokers and central banks.

Over the last week, indirect bidders for treasuries surged from the long-run 25%-30% average to a whopping 60%, something that sent a real shockwave through the financial market, since it showed that foreign investors still buy dollar denominated assets. However, how most of the financial press said that the Treasury changed without any signs or explanations the way it accounts for indirect bids. This has caused foreign demand for U.S. debt appear curiously strong, even though China and other important holders of U.S. debt complain rather often about the dollar’s weakness and announced publicly that are looking to reduce their holdings.

The Treasuries actions raise some questions because it tries to inflate foreign demand at a time when most market participants question the fate of the ever-growing U.S. deficit. These actions look like someone is trying to hide the truth, a painful truth that the economy is running on huge debt that no one is looking to finance, especially at the current interest rates. The same pattern – hiding/modifying the truth – could have been observed with other key economic reports too, like the CPI or M3 during a period when the market was looking to them for guidance. Currently, the Fed is among the only central bank in the world that does not publish the M3 numbers.

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