This morning's July TIC data that showed that overseas investor holdings of agency bonds, which comprise agency debentures and agency MBS, have dropped by $18 billion in July, as reported in a Bank of America Merrill Lynch report.

Since 3Q08, overseas investor holdings of agency bonds have dipped by $314 billion, which is equivalent to approximately 20% of their total agency bond holdings in June of last year.

Overseas investors were net buyers of $21 billion long-term U.S. assets in July. This can be mainly attributed to their net purchases of $31 billlion Treasurys and $29 billion stocks over that month, BofA Merrill said.

They were net sellers of both agency and corporate bonds. The demand for Treasurys went down from $123 billion in June to $31 billion in July as Treasury yields rallied, according to BofA Merrill. This has dampened their attractiveness for foreign investors.

Agency bond holdings of foreign official institutions dropped by $14.7 billion in July. This is a continuation of the trend seen over the past several months.

China's agency bond holdings dropped by $6 billion to $7 billion in July, adjusting for paydowns. This is compared with their Treasury holdings rising by $15 billion. BofA Merrill's view is that China is allowing its agency bond portfolio run off and is more actively buying Treasury bonds.

For example, China was a net buyer of $72 billion Treasury bonds since the start of 2009, BofA Merrill pointed out. However, the country's holdings of agency bonds dipped by $36 billion over the same period and the fall in their agency bond holdings happened in every single month this year.

Meanwhile, in July, Japan and Taiwan were buyers of $3 billion and $0.5 billion of agency bonds, respectively.

After offering a strong bid for long-term U.S. assets in June, U.K. investors, according to BofA Merrill, were net sellers of around $3 billion long-term U.S. assets in July. Most of the selling happened in corporate and agency bonds as they were net buyers of Treasurys.

Meawnhile, investors located in the Cayman Islands and Bermuda were net sellers of $5 billion agency bonds whereas investors located in Luxembourg bought $4 billion agency bonds.

The July TIC data seems to show, according to Bofa Merrill, that foreign official institutions are still not exhibiting that much interest in agency bonds and that they are letting their agency bond portfolios runoff.

However, there continues to be demand for Treasury securities, particularly when 10-year yields are above 3.5%. 

Bofa Merrill thinks that the outlook for demand for agency MBS from overseas investors is fairly bleak. This is because the heavy issuance of Treasury bonds is probably going to crowd out investments in agency bonds by this group.

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