Understanding the U.S. Treasury’s TIC Data

Understanding the U.S. Treasury’s TIC Data

The U.S. Government tends to spend quite a bit of money every year. The problem is the government doesn’t exactly have money in the bank that it writes checks against. Instead, the government—via the U.S. Treasury—has to borrow money by issuing debt in the form of U.S. Treasuries. This is especially true when the U.S. government is running up huge deficits in an attempt to stimulate the U.S. economy.

[VIDEO] Understanding TIC Data

Of course, issuing debt in the form of U.S. Treasuries is only half of the equation. For the equation to actually work, someone who is willing to buy the debt has to be on the other side—which makes the TIC Data crucially important.

Who Buys U.S. Treasuries?

Many different institutions and individuals buy U.S. Treasuries. Because U.S. Treasuries are backed by the full faith and credit of the U.S. Government, a broad range of investors—from the government of China to your Great Aunt Marge—choose to give their money to the U.S. Government.

However, the U.S. Treasury has been relying more and more on foreign governments—like the Chinese and Japanese governments—and less and less on individuals and institutions in the U.S. to buy the Treasuries it issues.

Treasury International Capital (TIC) Data

The Treasury keeps track of how much U.S. debt and other U.S. securities foreign investors are buying and releases that information in its Treasury International Capital (TIC) Data report each month. [Click here to see the current release.]

The TIC Data—also known as the Net Foreign Purchases of Long-Term Securities—tell us the value of the U.S. debt and securities foreign investors are buying compared to the value of the foreign debt and securities U.S. investors are buying.

For instance, if foreign investors purchase $75 billion of U.S. debt and securities and U.S. investors purchase $25 billion of foreign debt and securities, the net amount of foreign purchases would be $50 billion ($75 billion – $25 billion = $50 billion).

What Do We Learn from the TIC Data?

We learn one outrageously important thing from the TIC Data each month: how willing foreign investors are to purchase U.S. debt.

Remember, the U.S. is a debtor nation. The U.S. Government needs to be able to borrow money to function. If foreign investors stop buying U.S. debt, the U.S. Government is in a world of hurt because, at that point, the government will have to take actions—like raising interest rates (which would stifle the U.S. economy)—to make U.S. debt look more appealing to foreign investors.

Let’s take a look at what you should watch for when the TIC Data is released each month:

  • Rising TIC Data: If the TIC Data indicate the net purchases of long-term securities is increasing, you know that foreign investors are still interested in buying U.S. debt and that interest rates will most likely remain low.
  • Falling TIC Data: If the TIC Data indicate the net purchases of long-term securities is decreasing, you know that foreign investors are losing interest in buying U.S. debt and that interest rates will most likely need to rise in the future to entice more buyers.

Image courtesy Jack Spades.