Zeev's Turnips Patch-No Politics (ZEEV)

[basserdan]

"This Rob Kirby isn't very bright is he? I guess you along with him didn't bother to read the fine print."
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G'morning Train Guy,
No, I didn't bother to read the fine print as my interest was centered solely upon the emergence of the "Caribbean" buyers of US debt. Personally, I feel that this very timely "large buyer" is little more than the FED buying up it's own offerings when legitimate foreign buyers fail to step up to the plate.

From Russ Winter....

"Thursday's Contrary Investor is a must read, discussing the strange Caribbean flow of funds activity.
http://www.contraryinvestor.com/index.html

As you can see in the first table, the UK and “Caribbean buyers” have been the bedrock of foreign purchasing of US Treasuries as of late. Foreign buying of UST’s totaled $31.4 billion in March. The UK and Caribbean domiciled buyers bought $44.7 billion of UST’s. What would have happened without them? Taking a longer view, since November of last year when Asia's demand for Treasuries started to cool, the foreign community has purchased $99.5 billion in total US Treasuries. The UK and Caribbean buyers? They’ve bought $94.6 billion. In other words, they've accounted for 95% of total foreign buying. As the Asian “bankers” have made a pit stop in the US Treasury buying race at the very least for now, the UK and Caribbean buyers have pulled into the lead spot. Just how much gas do these two have left?

As you know, the Caribbean banking center buyers of US financial assets are largely anonymous. It is commonly thought that buying from this region represents activity in the wonderful hedge fund world, given that it’s the tax domicile of so many offshore funds with meaningful capital at their disposal. As you probably also are aware, among the bearish underground/conspiracy theorist encampment, the thought has also gone around that it’s the Fed who might be showing up in the Caribbean numbers. After all, the total Caribbean position in UST’s since last November is a bit shy of having doubled. Could the Fed be adopting the same mantle of anonymity with Caribbean accounts? Whether it’s the Fed or not we haven’t a clue. At this point in the market/global economic cycle, absolutely nothing would surprise us. But since neither we nor anyone else has any definitive data on the ultimate origin of specific or individual capital flows from the Caribbean banking centers, it’s simply that at this point – one big rumor.

Dismissing the Fed conspiracy theory for a minute, let’s say that the hedge crowd is truly loading the boat with Treasuries, largely supporting foreign capital flows into Treasuries for literally four+ months now. At the end of last November, the yield on the ten-year Treasury was quite near 4.4%. As of March month end, same deal, just a touch above 4.4%. In other words, capital appreciation over the four-month stretch in the 10 year, as the Caribbean buyers almost doubled their position in total UST holdings, was actually a bit negative point to point. C’mon, you know and we know that the hedge crowd chases performance daily, if not hourly, or weekly at worst. If equity sector rotation as of late doesn’t scream that fact, we just don’t know what does. Can it really be that the hedge crowd has been calmly and quietly accumulating a position in Treasuries over the last four months of reported data, content up to this point to have only earned the coupon return on the bonds (which by the way is about 1.47% in absolute terms for the 10 year over the November through March period)? Who knows, maybe the hedge crowd has gotten religion about long term investing, right? Sure they have. Secondly, if indeed the hedgies bought 62% of all US Treasuries purchased by the foreign community since November of last year, isn’t it true that at the margin Treasuries are moving into the hands of one of the most volatile players on the Street in terms of trading? And we’re to be comforted by the fact that the Caribbean/hedge players are now the third largest foreign holders of US Treasury securities? Either way, it doesn't sound like a wild positive.

As you know, we used the 10 year Treasury as a bond market, or UST market, proxy above. Clearly, the Caribbean buyers could have bought at any maturity on the UST curve. But, believing that the hedge crowd is really in it for the profit, as opposed to nationalistic benevolence, we’d have a hard time believing they were loading up on short Treasury paper right smack in the middle of Fed rate hike actions. Short dated paper has not exactly been a winner over the November through March time frame. Anyway, there you have it. Is the UK and the Caribbean community the new US banker? Do they have the financial wherewithal and staying power to pick up the baton from the Asian community in terms of purchasing US financial assets at the margin as we move forward? So, if Hu’s on first, what’s on second? The hedge funds? The numbers trend in foreign capital flows since last November are forcing us to address these questions. Given that a number of hedge funds may have taken on a fair amount of water in April and early May due to exposure to GM and credit default instruments, it will be more than interesting to see if the Caribbean is the source of meaningful capital inflows into US financial assets in the months ahead. For now, the big news in our minds is the sustained lack of Asian buying of US financial assets over the recent past. As is true in any asset class as far as forward price is concerned, the key question is, "who's the next buyer?" And given politically motivated US verbal attacks regarding Yuan revaluation (we just had another "threat" from the US Treasury this Tuesday) and potential tariff legislation against China, we're not so sure it's going to be Hu."

http://www.siliconinvestor.com/readmsg.aspx?msgid=21342770