According to the Treasury International Capital System (TIC) January data, the total net purchases, which refer to purchases and sales and exclude paydowns on agency MBS, were $6.3 billion.
Bank of America Merrill Lynch analysts reported that net of paydowns amounting to $17.5 billion, overseas holdings of agency MBS dropped by $11.1 billion. This means another month of weak net demand for agency MBS from overseas buyers, analysts said.
They added that a notable takeaway from this is that the net purchases are not keeping up with the paydowns in the agency MBS overseas portfolios. Analysts are projecting net demand of $25 billion from overseas investors this year. Unless overseas buyers, they said, reinvest most of their paydowns, the overseas agency MBS net demand will be much less versus their 2011 estimates.
The analysts reported that foreign official institutions held 62% of all overseas holdings of agency MBS as of June 2010. They cited the two data series in TIC data that can be utilized to get some indications for foreign official institution demand. The first is using country-level data for those countries where foreign central banks are the main demand source and the TIC data reported for foreign official institutions in aggregate.
Data presented by the bank showed the biggest agency securities (MBS + agency debt) net buyers and sellers in January. South Korea was the largest purchaser of agency bonds in January. Additionally, agency bond net purchases from China rose considerably month over month, which is interesting since China was a seller of Treasurys in January, analysts stated.
The two data points, according to BofA Merrill researchers, would seem to mean that foreign official demand actually picked up in January. But, the aggregate number reported for foreign official institutions showed selling of $1.6 billion in agency securities.
"It is a bit perplexing to us that the countries with big foreign official institutions are reporting buying in January 2011, while the aggregate foreign official institutions data shows otherwise," they wrote.
An added foreign official institution demand source is the custody holdings data from Federal Reserve Board of New York, which indicated a rise of roughly $14 billion in official institution custody holdings of agency securities in January. It seems that the Fed series is more in line with the TIC data if net purchases from countries with big foreign official institutions are considered and not the aggregate foreign official institutions number.
Analysts from BofA Merrill added that considering the unfortunate turn of events in Japan, the near-term demand outlook for agency MBS from Japan has become uncertain. As of June 2010, Japanese institutions had $106 billion in agency MBS. Meanwhile, analysts noted that agency MBS net monthly demand from Japan in January was slightly more versus the paydowns.