The December TIC data showed that overseas investors were net sellers of $37.5 billion agency bonds (agency debentures combined with agency MBS) over the month.

This brings their cumulative net selling of agency bonds in 2H08 to $170 billion, according to a report from Merrill Lynch.

Merrill highlighted several points from the TIC data. The first is that overseas investors were net buyers of $22.4 billion long-term U.S. assets in December versus net selling of $60 billion in November. These buyers purchased Treasurys and corporate bonds while the selling pressure was focused on the agency bond market.

According to Merrill, foreign official institutions were net sellers of $15 billion  agency bonds in
December, which brought their cumulative net selling in 2H08 to $95 billion.

"We believe that most of this selling had occurred in agency debentures rather than in agency MBS but the persistent selling of agency bonds by foreign official institutions during every single month from July to December is certainly a worrying trend," Merrill analysts wrote.

Another fact they highlighted was that China (including Hong Kong) was a net seller of $1.2 billion agency bonds over the month. Meanwhile, Taiwan seems to be active after a long time and bought $3.7 billion agency bonds in December.

Merrill also noted that Japan and Korea together were net sellers of $6.5 billion agency bonds in
December, which is a continuation of the trend that started in 2H08.

The Petrodollar related flows (i.e., flows from Russia, Norway and the U.K.) were obviously negative as they sold $22 billion agency bonds in December.

Buyers that were located in Cayman Islands sold $4.5 billion agency bonds over the month, although  Luxembourg and Bermuda were comparatively quiet. Merrill analysts think that leveraged institutions registered in Cayman Islands, Luxembourg and Bermuda own very few agency bonds at the moment.

Merrill concluded by saying that the December TIC print appears to further confirm analysts' worst fears regarding the continuation of demand for agency bonds from overseas investors.

Even after the Government stepped in to support the GSEs in September, overseas investors are still selling agency bonds and the selling pressure is coming from almost every single signficant overseas investor group, Merrill said.

As previously discussed in the firm's 2009 outlook report, Merrill analysts think that overseas investor demand for agency bonds/agency MBS will stay relatively weak in the next several months.

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