After reviewing a lot of data showing some pretty severe a shifts in the quantity and type of foreign investment is US assets, Mr Setser concludes thusly:
The “quality” of the financial flows into the US consequently bears watching. A modest revival in foreign demand for longer-dated US assets would be a positive sign. To date, the sale of US assets abroad and a scramble for liquid dollar assets has provided the US with more than enough financing to sustain its deficit. Those flows though may not continue.
And if — as seems likely — foreign demand for Treasuries fades long before the US fiscal deficit, the US Treasury will need to sell an awful lot of Treasuries to American investors. For the past several years I have argued that it was almost impossible to overstate the impact of central bank demand on the Treasury market.
That may no longer be the case going forward.
The world is changing. Global reserves aren’t growing. The echo from their past peak that we observe in the current Treasury data will fade
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