Why do foreign countries buy Treasury Bonds and not TIPS

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
tc101
Posts: 3416
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Why do foreign countries buy Treasury Bonds and not TIPS

Post by tc101 »

Someone mentioned this a few weeks ago and I have been thinking about it ever since. If TIPS are a good deal, why don't foreign government buy them?
. | The most important thing you should know about me is that I am not an expert.
User avatar
stratton
Posts: 11083
Joined: Sun Mar 04, 2007 5:05 pm
Location: Puget Sound

Re: Why do foreign countries buy Treasury Bonds and not TIPS

Post by stratton »

tc101 wrote:Someone mentioned this a few weeks ago and I have been thinking about it ever since. If TIPS are a good deal, why don't foreign government buy them?
Only about 10% of tresuries are TIPS and they don't trade that much comparatively.

Where you can see this is the college endowments can be 9 or 10% TIPS such as Yales which would be ~$2 billion. Then you look at Calpers with $160 billion plus and they are like 3% TIPS which is ~$5 billion. I don't think Calpers can get enough to get more than 3% without tilting the market. I'm guessing some smaller endowments are probably loading up on TIPS right now while they are on sale.

Paul
asamir
Posts: 75
Joined: Thu Feb 22, 2007 8:51 pm

Post by asamir »

Liquidity.
eurowizard
Posts: 1005
Joined: Sat May 10, 2008 10:26 am

Post by eurowizard »

Why would a foreign country want to invest in something that indexes against another currencies inflation rate? Wouldnt it make more sense to hedge against their own currencies inflation?
ziggy29
Posts: 925
Joined: Mon Mar 10, 2008 7:08 pm
Location: Southeast Texas Boonies

Post by ziggy29 »

I don't know about foreign countries, but the more I think about it, the more it seems to make sense to buy TIPS and short regular Treasuries. If you believe (as I do) that eventually, all this money printing and debt issuing will be very inflationary and cause Treasury yields to spike, it seems like a long position in TIPS and a short position in Treasuries is a fairly low-risk arbitrage that will make money when/if inflation and long interest rates rise.
grumel
Posts: 1629
Joined: Fri Mar 30, 2007 1:38 am
Location: Germany

Post by grumel »

Why should foreign governments buy any US government bonds?
Eureka
Posts: 1123
Joined: Thu Apr 05, 2007 10:24 pm
Location: Illinois

Post by Eureka »

ziggy29 wrote:I don't know about foreign countries, but the more I think about it, the more it seems to make sense to buy TIPS and short regular Treasuries. If you believe (as I do) that eventually, all this money printing and debt issuing will be very inflationary and cause Treasury yields to spike, it seems like a long position in TIPS and a short position in Treasuries is a fairly low-risk arbitrage that will make money when/if inflation and long interest rates rise.
The chorus grows of those who think pumping so much money into the economy will cause huge inflation down the road. While it makes sense, it is rapidly becoming conventional wisdom. The contrarian in me hopes absolutely everyone is saying it soon.
eurowizard
Posts: 1005
Joined: Sat May 10, 2008 10:26 am

Post by eurowizard »

ziggy29 wrote:If you believe (as I do) that eventually, all this money printing and debt issuing will be very inflationary and cause Treasury yields to spike, it seems like a long position in TIPS and a short position in Treasuries is a fairly low-risk arbitrage that will make money when/if inflation and long interest rates rise.
So you believe that TIPS which are based on the CPI have something to do with real inflation numbers? When the CPI was stated at 4.x% earlier this year, I had a 35% cost of living increase due to food and fuel costs. The voodoo magic that the CPI calculation does not reflect actual inflation Gold historically has.
User avatar
Topic Author
tc101
Posts: 3416
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Post by tc101 »

Why should foreign governments buy any US government bonds?
I don't understand it, but obviously China, Japan, and lots of other foreign governments hold huge amounts of them. Was it a rhetorical question?

Here are the exact numbers http://www.ustreas.gov/tic/mfh.txt
. | The most important thing you should know about me is that I am not an expert.
Shortsellforfun
Posts: 73
Joined: Sat Aug 16, 2008 1:02 pm

Deflation is possible

Post by Shortsellforfun »

ziggy29 wrote: If you believe (as I do) that eventually, all this money printing and debt issuing will be very inflationary and cause Treasury yields to spike, it seems like a long position in TIPS and a short position in Treasuries is a fairly low-risk arbitrage that will make money when/if inflation and long interest rates rise.
Let me know if you have a broker that will let you short treasuries (or anything else) and put the proceeds anywhere but your CASH acct. Perhaps you can short treasury futures and obtain an equivalent position.

However, it seems to me that the debt being issued by the USG only partially replaces the debt that was once issued by Wall Street via MBS and Consumer Leading Securities. We saw the initial flow-through of the Wall Street debt in the recent commodity inflation. As evidenced by the commodity bust, deflation is still very possible.

The shifting of debt creation from private to public hands is quite risky for the US (just as personal debt is somewhat risky -- although less so since Debtors prisons do not exist). The USG cannot (will not) default on its obligations and MUST repay at least the interest-portion either by taxing or printing money.

I liked the book "When Washington Shut Down Wall Street" for a day-by-day history of a banking/currency crisis.
snowman9000
Posts: 1003
Joined: Tue Feb 26, 2008 10:16 am

Post by snowman9000 »

tc101 wrote:
Why should foreign governments buy any US government bonds?
I don't understand it, but obviously China, Japan, and lots of other foreign governments hold huge amounts of them. Was it a rhetorical question?

Here are the exact numbers http://www.ustreas.gov/tic/mfh.txt
An undocumented wink-wink or gentlemen's agreement that in return for the US buying goods from the mideast and asia, and providing military security for same, they would buy our bonds at low interest rates, to finance our trade and budget deficits. This benefits their mercantilist economies.

At some point though, the tail will wag the dog.
grumel
Posts: 1629
Joined: Fri Mar 30, 2007 1:38 am
Location: Germany

Post by grumel »

tc101 wrote:
Why should foreign governments buy any US government bonds?
I don't understand it, but obviously China, Japan, and lots of other foreign governments hold huge amounts of them. Was it a rhetorical question?

Here are the exact numbers http://www.ustreas.gov/tic/mfh.txt
But those are for curency policy. Maybe sometimes some other policy. Good returns are no priority there.
User avatar
cato
Posts: 230
Joined: Thu Dec 20, 2007 7:39 pm
Location: Portola Valley, CA

Post by cato »

Eureka wrote:
ziggy29 wrote:I don't know about foreign countries, but the more I think about it, the more it seems to make sense to buy TIPS and short regular Treasuries. If you believe (as I do) that eventually, all this money printing and debt issuing will be very inflationary and cause Treasury yields to spike, it seems like a long position in TIPS and a short position in Treasuries is a fairly low-risk arbitrage that will make money when/if inflation and long interest rates rise.
The chorus grows of those who think pumping so much money into the economy will cause huge inflation down the road. While it makes sense, it is rapidly becoming conventional wisdom. The contrarian in me hopes absolutely everyone is saying it soon.
To ziggy, I say "bingo." That's precisely what I'm doing. So, I'm long on TIPs, long on Munis, and short on Long Bonds (via TBT). The TBT fund shorts long treasury futures, which should respond the most to increases in inflation. Unfortunately, its tracking is not perfect.

To eureka, your contrarian concern is well taken. PV = nRT (or is that the combined gas law?). In any case, inflation is "always and everywhere a monetary phenomenon." There is no question that "high-powered" money has skyrocketed. The question is: has this translated into an increase in broad money? OR, has a decrease in the money multiplier (or money velocity) offset that and actually reduced the supply of broad money? I think that it has. However, I'm betting that effect will be temporary and the massive increase of HPM will work its way out.

Moreover I think the next govt. step will be expansive fiscal policy that is immediately monetized by the fed. IOW, future bailouts will be with newly printed money. It's probably the right thing to do, but it will be inflationary.


p.s. I stayed in a Holiday Inn Express AND I took Monetary Econ from former Fed Governor, Mishkin.
Citigroup delenda est.
User avatar
Doc
Posts: 9934
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Post by Doc »

cato wrote: PV = nRT (or is that the combined gas law?).
Actually its the "ideal" gas law.

(I forgot too and had to goolge it.) :lol:
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
Post Reply