The Treasury International Capital reports — gauge inflow of capital with the TIC report

The Treasury International Capital reports measure the monthly demand of international investors and governments for US private and government securities. The TIC report measures the US financial account, and as such it is of great importance in demonstrating the inflow of foreign capital into the US which is used by the private sector for investments, and by the government for borrowing and spending on matters such as infrastructure, warfare, etc. Also, comparison of the TIC with the current account surplus or deficit gives an idea of the sustainability of the US external position. If the US deficit cannot be financed by regular inflows, interest rates may have to go up, squeezing economic growth, and in the worse case, insufficient foreign purchases may even imply collapse in the value of the dollar. The report has two broad sections, detailing the short term and long term part of the US capital account. The short term section includes bank liabilities, short term US Treasury securities, and the liabilities of US customers to foreign entities via US banks. The TIC report doesn’t include direct investment flows and a number of other items that are a part of the capital account.

According to the Treasury’s website the TIC system (in addition to the report) provides:

• monthly data on transactions in long-term securities;
• monthly and quarterly position data on claims and liabilities (including some short-term securities) reported by banks and broker/dealers of securities;
• quarterly position data on selected claims and liabilities reported by non-banks and non-broker/dealers;
• annual position data on holdings of long-term and short-term securities; and quarterly

Let us examine the contents and components of the TIC report.

1. Gross Purchases of Domestic U.S. Securities: The item measures the total securities purchases of foreigner without subtracting their total sales. This one states the total amount including long and short term securities, private and public in sum, without making any distinctions.
2. Gross Sales of Domestic U.S. Securities measures the total securities sales of foreign entities without considering their purchases. Similar to the above, this item includes all kinds of sales
3. Domestic Securities Purchased, net measures the total out or inflow of capital from the US via foreign purchases or sales, and it is therefore one of the more important items on the list. It is calculated by subtracting gross sales from gross purchases. Items 4 and 5 break down this component into its private and official parts.
4. Private, net /2: This section states all the private parts of the TIC report, including long and short term capital flows. It states private purchases of Treasury bonds and notes, government agency bonds (such as the papers of GSE’s Fannie and Freddie Mac), US corporate bonds (those issued by commercial and financial firms for financing investment and operations), and equities traded on stock exchanges.
5. Official, net /3 measures the same kind of transactions as mentioned in the above item, the only difference lying in the fact that the buyers are foreign governments and their affiliates, such as Central Banks, public institutions, and so on.
6. Gross Purchases of Foreign Securities from U.S. Residents measures the inflow of capital to the US through securities sold by US residents to foreign entities. The character of this item with respect to capital in- or outflows is similar to item 1 above.
7. Gross Sales of Foreign Securities to U.S. Residents: The opposite of item 6, this one measures the total foreign security purchases by US residents. This item is similar to item 2 above.
8. Foreign Securities Purchased, net measures the total out- or inflow of capital from the US via domestic purchases or sales of foreign securities. Similar to item 3 above, this is the other important component of this report, and it is calculated by subtracting item 7 from item 6. It is further broken down into its bond and equity components in the TIC report.
9. Net Long-Term Securities Transactions is the most important component of the report, and therefore receives the greatest media attention, usually. It measures the total capital flows into the US via long term transaction like bond or equity purchases. These are considered long-term because of the the assumption that the entity which buys them will hold them for interest income or capital gains, unlike the short term component which mostly consists of . Of course, this is not always the case, but the long term securities section of the
10. Other Acquisitions of Long-term Securities, net measures all other kinds of long-term transactions not mentioned in the above cathegory.
11. Net Foreign Acquisition of Long-Term Securities measures the total acquisitions of foreigners of US securities, with everything netted out. It is calculated by adding 10 to 9.
12. Increase in Foreign Holdings of Dollar-denominated Short-term U.S. Securities and Other Custody Liabilities measures the short term component of the TIC report. It includes short –term US Treasury securities, and bank and broker liabilities to foreign entities.
13. Change in Banks' Own Net Dollar-Denominated Liabilities measures the liabilities of banks themselves, not including the liabilities of customers. 14.Monthly net TIC flows finally measure the total long and short term capital flows in and out of the US on a net basis. The item is calculated by adding 11, 12, and 13 together.

From the trader’s perspective, the TIC report provides important perspectives on a number of issues, and allows the trader to evaluate the capital account side of the balance of payments.

First of all, if the nation (in our case, the United States, but these data are also available in a piecemeal fashion from every other nation in the world) is unable to finance its deficits through long term capital flows, it will face the problems related to dependence on short-term financing, sooner or later. It’s not always possible to predict the time of a capital flight on the basis of inflow and outflow data; we also need to have a good analysis of the general market circumstances (how easy is credit, how stable is the global political climate, which phase of the cycle is the global economy going through? ). But dependence on a large short term financing is always a red flag for the health of a nation’s economy. Such a nation will be hurt worse by market shocks and turmoil than one with less short-term exposure. We will be willing to short such a currency in times of economic uncertainty, because we anticipate the drying-up of short term financing, and the consequent balance of payments issues. (Of course the USD is always a different case because of its status as the reserve currency, so one should in general be very cautious about making such bets about it.)

Secondly, the components of the data allow us to have an idea on investor appetite for different kinds of securities in the US (and the equivalent of this data would also indicate the same for another nation). What kind of use would the trader make of this data? Knowing if foreigners are buying or selling US equities can be useful gauge for stock market trends (and hence, the carry trade). The US is the bellwether of the global stock markets and because of the depth and sophistication of its financial markets, it’s often the only major market that is capable of absorbing the savings of large private and governmental institutions around the globe. A lack of appetite for US securities is usually a sign of general economic malaise, regardless of the condition of the US economy.

Third, the net purchases of US residents of foreign securities is a gauge of repatriation flows to the US. It shows how rapidly and for how long US based investors are liquidating assets overseas, and consequently it is a good indicator for dollar demand and emerging market stability. As always, the analyst must keep in mind that the impact of these changes can last longer than the shock generated by a sudden withdrawal of liquidity from the markets in question. Many emerging markets depend on continuing US investment for financing of their development strategies, and repatriation of USD can lead them to do anything from printing money, to changing the exchange rate regime, to defaulting on foreign loans. Of course, US is not the only source of capital in the world, but because of the reasons which we mentioned in the above paragraph, it is certainly the most important.

In fact, the TIC report can be used for many other purposes, when the information provided by it is combined with other data from different sources. But even without that kind of sophisticated analysis, it is one of the most useful reports for measuring the health of the US and the global economy, and the beginning analyst is well advised to study the data carefully.