Friday 17 April 2020

Could foreign ownership of $4Tn of US Corporate debt be the $600Bn cross currency margin call of this cycle?

So I looked through the Treasury TIC data on who owns what fixed income/ credit assets in the US. 

The US has run a Current Account deficit this cycle of about $450bn a year, so around $5Tn cumulatively since 2009.  A couple of points:
  1. Someone had to fund that with their savings
  2. The Gross funding data is bigger as US investors also buy assets abroad
  3. Financials, especially banks own duration funded short term, in many cases the FX basis swap rolls every 3 months, so while in theory they can hold investment grade debt to maturity, in reality at least part of the funding needs to be rolled quarterly.
So since 2009 US GDP has gone from $14.45Tn to $21.4Tn or +$7Tn, +48%.

But to June 2018 there has been about a $10Tn increase or 47% of 2019 GDP increase in foreign holdings of US securities. Roughly 50/50 split equity and debt. The CA deficit has been running at about $450bn a year on average.

Foreigner owned corp debt looks to have grown about 70% from $2tn to $3.4tn in 2018

Net position deteriorated:

Foreign holdings of Corp debt, $1.9Tn to $3.4Tn. So a 15% price drop would be about a $510bn margin call:

Held by the obvious holders:

In Corporate debt bank and financial debt is the most common holding:

They owned 28% of corporate debt:

Using the monthly TIC data, the EU and UK/ City has been two of the big cumulative funding sources:

Japan also bought bank debt and I believe this excludes CLOs/ loans:

Using the monthly data foreign holdings of US debt rose $1Tn YoY to January and US corporate debt holdings rose to $4.2Tn by January 2020. But foreigners have been Corporate bond net sellers since last August, ie since the US curve inverted:

Cross border data is a bit harder to get but the TIC data has some and the BIS also does. 

The table below summarises what I understand is TIC data showing US bank to foreign financial firm USD repos; they have grown 200% in this cycle but collapsed 40% in 2008:

BIS reported cross-border bank lending has been growing over 10% recently, but shrank after 2008:

BIS US bank cross-border loans to non-bank financials:

US bank liabilities to Japanese entities:

So is one of the weak links US corporate debt, including US financial debt, held 3-month xccy basis currency swapped, by EU and Japanese banks and insurers, whose own balance sheets are leveraged 10-20x? 
Perhaps, the data I could find is not that granular, but we know QE leakage from Japan and EU caused xccy FX basis spreads to widen out precisely because of this imbalance.

Seems like a 15% price drop is the equivalent of a $600Bn quarter end margin call. This might help explain the scale of the sell off of US investment grade credit in March. But I don't feel like the bottom is in yet. It does not feel like there has been enough forced selling or a big enough bankruptcy yet. 
Either way foreign holders of US corporate debt have been selling since last August, and attracting a lot of net Treasury investment at near zero yields might be a struggle. The US has a $400bn pus CA deficit to finance. All of this points towards a much weaker US Dollar in Trump's likely second term. 

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