U.S. receives higher capital inflows

Capital flows data suggest that while foreign official institutions may be reducing their U.S. Treasuries holdings, there is no dearth of demand for U.S. FI from private investors. The effect of a reduction in Treasury holdings of foreign central banks is unlikely to be significant for rate levels even from a narrow supply-demand perspective, argues Barclays. 

Foreign official institutions tend to have front-loaded portfolios limiting duration supply from any sales, while private investors who are pulling money out of EM could redeploy funds in US fixed income securities. This provides an offset. 

"China's FX reserves are unlikely to keep falling at the current pace. If downside risks in China intensify, a meaningful devaluation of the currency would become more likely. Any such move would likely lead to a risk-off environment, likely delaying/slowing hikes and tempering any increase in long-term rates", states Barclays.

Earlier in the week, China reported its FX reserve levels, which show that outflows continued, albeit at a much slower pace; reserves fell $43bn in September after falling $94bn in August. The net outflow in September was likely smaller than the reported headline decline after adjusting for currency moves, as the USD appreciated against major currencies for the month. 

In contrast, the USD depreciated in August, suggesting that the net outflow was larger than the reported $94bn decline. Hence, the deceleration in outflows was even starker than the headlines suggest.