Foreign demand for US debt and TIC reporting


Wednesday, January 8, 2020 | By Ethan Long, Associate Manager, Regulatory Solutions

Foreign demand for US debt and TIC reporting

Historically, U.S. debt has been one of the most liquid investments in the world, making it a safe option during times of uncertainty. This has made U.S. Treasuries an attractive investment to foreign investors looking for stable, relatively risk-free, positive returns. The U.S. Treasury tracks the flow of capital into and out of the U.S. for economic policy as an input into the U.S. Balance of Payments account. This data is also released to the public and can be used to help predict future movements of the U.S. dollar, as well as show the demand that foreign investors have for U.S. Treasuries. This information is especially important for both monetary policy and understanding macroeconomic factors affecting the economy, specifically the recent trends surrounding foreign demand for U.S. Treasuries and the current geopolitical climate. The system by which this is tracked is within the Treasury International Capital (TIC) reporting system.

China, along with Japan, has been one of the largest purchasers of U.S. debt, making their demand for U.S. Treasuries an integral component of the price and yield rates of U.S. Treasuries. While demand from China has slowed, foreign demand for U.S. treasuries has actually increased this year as investors look for stable returns in the midst of global uncertainty. With the rise of sub-zero and low-yield treasury securities across Europe and Japan, a consistently strong U.S. dollar, and uncertainty about the U.S. and China trade deal, foreign investors have turned to U.S. Treasuries as a safe investment with positive yields. Although currently the slowing demand from China is not leading to an overall decrease in foreign investment in U.S. Treasuries, due to the other factors discussed above it is important for monetary policy to track this information and understand the risk.

The risk of this slow-down is that a substantial sell-off could be met without a corresponding demand from buyers, leading to a steep decline in the value of U.S. Treasuries and an increase in yields. It is also worth noting that China could use its holdings in U.S. Treasuries as leverage during the continuing trade war negotiations. This is unlikely because a massive sell-off would also hurt China’s economy, and comparable investments are limited, but the potential impact on the U.S. economy warrants consideration of this possibility.

The U.S. Treasury adjusts its monetary and international financial policies to mitigate these risks, and correct TIC reporting is integral to informed decision-making. Many parties are responsible for TIC reporting, including financial institutions with foreign investors or investments. This reporting requirement can be cumbersome depending on the amount of reportable transactions and reportable holdings that a fund engages in. SS&C Technologies offers a solution to lessen the operational burden that TIC reporting can put on a fund by enhancing data received from either internal SS&C sources or external fund accounting teams. SS&C provides a team of professionals to complete the regulatory filing while limiting change to any existing operations at the prospective client. Please refer to our regulatory reporting solutions and services page for further information on how SS&C can assist in preparing the applicable TIC reports.

Download our SS&C Regulatory & Analytics Solutions brochure to learn more about Treasury International Capital Reporting and how SS&C can help you stay compliant as regulations arise or change.

 

Sources:

https://www.cnbc.com/2015/10/16/tic-the-most-important-report-youve-never-heard-of.html

https://www.investopedia.com/terms/t/treasury-international-capital.asp

https://www.wsj.com/articles/foreign-demand-for-treasury-debt-surges-11571332228

https://www.reuters.com/article/us-usa-treasury-securities/china-sells-most-us-treasuries-in-nearly-two-and-a-half-years-idUSKCN1SL2U4

https://www.washingtonpost.com/business/why-chinas-us-treasuries-are-a-double-edged-sword/2019/05/13/1b377da8-75a4-11e9-a7bf-c8a43b84ee31_story.html



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