Trillions flying by so fast, it’s hard to even count them. But somebody had to buy these Treasury securities. And it wasn’t just the Fed. Here’s who. By Wolf Richter for WOLF STREET. In the 12 months through February, before the Pandemic started – those were the Good Times when a government shouldn’t have to borrow heavily – the US government added a breath-taking $1.4 trillion to its already huge pile of debt. And then came the Pandemic and the bailouts and the stimulus payments and all the other stuff, and over the six months since then, the US government added another $3.3 trillion to the Incredibly Spiking US Gross National Debt that now amounts to $26.8 trillion: With the release yesterday afternoon of the Treasury Department’s Treasury International Capital data through July 31, Fed balance sheet data, bank balance sheet data from the Federal Reserve, and the Treasury Department’s data on Treasury securities, we can sort out who bought those trillions of dollars in Treasury Securities over the past 12 months. Foreign investors: Foreign investors all combined – central banks, government entities, companies, commercial banks, bond funds, other funds, and individuals – added $287 billion to their holdings in July compared to July last year, including $48 billion during the month of July. This brought their holdings to a record of $7.087 trillion (blue line, right scale in the chart below). But due to the Incredibly Spiking US National Debt ($26.5 trillion on July 31), their share of this debt (red line, right scale), after plunging in June to the lowest since 2008, only held steady in July, at 26.7%: America’s biggest foreign creditors, Japan and China: Japan increased its holdings in July by $32 billion, to a total of $1.29 trillion. Over the 12 months, its holdings increased by $162 billion. China whittled down its holdings further in July. Over the 12-month period, its holdings fell by $37 billion, to $1.07 trillion, following the trend (green line) since 2015, with exception of the plunge and recovery around its capital-flight phase. Combined, Japan and China held 8.9% of the Incredibly Spiking US debt, the second-lowest share in many years, with the lowest having been in June (8.8%): The next 10 largest foreign holders (in parenthesis their holdings as of July 2019): UK (“City of London” financial center): $425 billion ($406 billion) Ireland: $330 billion ($257 billion) Hong Kong: $267 billion ($235 billion) Brazil: $265 billion ($309 billion) Luxembourg: $265 billion ($229 billion) Switzerland: $251 billion ($228 billion) Cayman Islands: $213 billion ($233 billion) Belgium: $211 billion ($203 billion) Taiwan: $210 billion ($179 billion) India: $195 billion ($160 billion) This list is studded with tax havens and financial centers, including those where US corporations have mailbox entities that hold assets in an effort to dodge US taxes. So some of these “foreign” holders are US entities, such as Apple in Ireland, with accounts registered in their mailbox operations there. Missing from this list are Germany and Mexico, which hold only $78 billion and $48 billion respectively in Treasuries, despite their mega-trade surpluses with the US. US government funds The Social Security Trust Fund, pension funds for federal civilian employees, pension funds for the US military, and other government funds shed $15 billion in July and $21 billion over the 12-month period, which whittled down their holdings to $5.89 trillion (blue line, left scale), amounting to 22.2% of total US debt (red line, right scale). Even though the Treasury holdings of these government pension funds have more than doubled over the past 20 years, their share, given the Incredibly Spiking US National Debt, has dropped from over 45% in 2008 to 22.2% in July: These Treasury securities, often called “debt held internally,” are assets that belong to the beneficiaries of those funds. They’re an actual debt of the US government, despite the old nonsensical saw that “it doesn’t count because we owe this to ourselves.” These are funds that the US government owes American beneficiaries, just like the funds that the US government owes Japan and China. The Federal Reserve. In July, the Fed added $89 billion to its Treasury holdings, bringing its total holdings at the end of July to $4.29 trillion (blue line, left scale), amounting to a record of 16.2% of the Incredibly Spiking US National Debt (red line, right scale) – that’s the portion of the US debt that is has monetized. Over the 12-month period through July, the Fed added $2.18 trillion in Treasuries to its holdings, most of it since March, doubling its pile: US Commercial Banks. US commercial banks added $66 billion in Treasury securities to their holdings in July, and $228 billion over the 12-month period, to a total of $1.14 trillion, according to the Federal Reserve’s data release on bank balance sheets, amounting to 4.3% of the total US debt. Other US entities & individuals Above, we covered all foreign investors, plus US government funds, the Fed, and US banks. What’s left are other US investors – both individuals and institutions such as US bond funds, US pension funds, US insurers, cash-rich US corporations, private equity firms to park cash, hedge funds to use them in complex trades, etc. During the market tumult, they all piled into Treasury securities, some possibly in panic, others to engage in or get out of risky trades, adding $1.8 trillion over the three-month period through June. But in July, they shed $93 billion, bringing the holdings down to $8.1 trillion (blue line, left scale), amounting to 30.6% of total US debt (red line right scale). The surge in holdings was followed by the spike in the US debt, and the percentage that these investors held in July (30.6%) was roughly level with their share at the end of the year (30.5%): The chart below shows Treasury holdings by category of holder combined into one chart, with the US debt piled up in all its majesty: Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
The formerly hot asset class was already troubled by a multiyear decline in student enrollment and a surge in upscale supply. By Wolf Richter for WOLF STREET. “Student housing,” a subcategory of multifamily housing (apartments) in commercial real estate, is now dealing with an existential crisis – similar to retail and lodging. The mortgages backed by this once a hot asset class have been packaged into commercial mortgage-backed securities (CMBS) and sold to investors. Students aren’t exactly stable tenants. And the risks are high even in the Good Times. Delinquency rates of 30-plus-days on the student-housing mortgages that back $4.7 billion in “private label” CMBS (not backed by Fannie Mae or Freddie Mac) started surging in 2019, and by January 2020 hit 10%, under the impact of oversupply of student housing, particularly the trend to “luxury student housing,” that came along with the eight-year trend of declining student enrollment. And then the Pandemic washed over student housing. The 30-plus-day delinquency rate by loan balance hit an all-time record of 13.7% in July, according to Trepp which tracks CMBS. Then in August, the delinquency rate ticked down to 13.1% (blue line), the 2nd highest ever, in part because some of the delinquencies were “cured” by entering the delinquent loans into forbearance agreements. For now, all other apartment property types (red line in the chart below) – despite the eviction bans – have shown relatively little stress, with a 30-plus-day delinquency rate at just 1.9% in August (chart via Trepp): The straight-down plunge in the delinquency rates of all other multifamily housing types in early 2016 was in part the result of the $3-billion delinquent loan, backed by Stuyvesant/Peter Cooper Village in New York City, being resolved after Blackstone and Ivanhoe Cambridge purchased the property. In addition, in August, the rate of student housing mortgages in “special servicing” – when a special servicer is put in charge of the loan – was 11.2%. And the rate of student housing mortgages on the servicer watchlist rose to 19.4%. By August, $1.6 billion in mortgages backed by 101 student housing properties have requested or were already granted COVID-19 financial assistance. Student housing is built on the foundation that students live on or near campus, and not at their parents’ place. For many people, it’s the first time living away from the parental umbrella, and it’s a blast. Or was a blast. Now colleges are struggling with the pandemic. Some colleges are still doing remote learning only. Others have opened their campuses at reduced capacity. Some that have opened their classrooms have had new outbreaks on campus and closed their classrooms again and switched back to remote learning. For students, this is a hugely frustrating and expensive mess. For example, one of the largest mortgages among these troubled student-housing mortgages that was granted forbearance, according to Trepp, is the $82.6-million loan, secured by The View at Montgomery, near Temple University, in Philadelphia, PA. In addition, the property secures a $9.8-million Agency mortgage that was packaged into a government-backed CMBS. On September 3, Temple University announced that “in-person course instruction” has been suspended for the fall semester. This is what a now largely useless apartment at The View at Montgomery looks like: And student-housing property prices are falling too. According to the Green Street Commercial Property Price Index, prices in August for student housing properties across the US have dropped by 11% since the onset of the Pandemic and by 12% over the past 12 months. This was behind only the 28% year-over-year plunge in prices of malls, the 25% plunge in prices of hotel properties, and the 14% drop in prices of strip-mall properties. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
In the bizarre machinery of an economy that depends on consumer spending funded by stimulus and “extend and pretend.” By Wolf Richter for WOLF STREET. OK, get this: At a time when there are 29.6 million people claiming state or federal unemployment insurance because they lost their work in the worst economy of a lifetime, subprime auto-loan delinquencies, which in the past had spiked during much smaller labor market downturns, are doing the opposite: they’re dropping. Meaning, since April, people with subprime credit ratings are defaulting a lot less on their auto loans than they did during the Good Times. In August, delinquencies of 60 days and over of subprime auto loans that have been securitized into auto-loan Asset-Backed Securities dropped to 3.49% of total auto loans (prime and subprime), the lowest delinquency rate for any August in seven years, according to the Auto Loan Delinquency Index by Fitch Ratings. That was down 2.44 percentage points from August 2019, when the delinquency rate was 5.93%: The 60-day-plus delinquencies started dropping in May. And given that May’s 60-day delinquencies were 30-day delinquencies in April, when tens of millions of people lost their jobs, it makes for a curious phenomenon. This is particularly curious because from 2014 on, private-equity firms piled into the subprime auto-loan space, the lending became very aggressive, underwriting standards went to heck, and delinquencies surged as a result. But interest rates charged on those loans were so high – well into the double digits – that the game could go on, with defaults ballooning to levels far higher than during the peak of the Great Recession, and those were the Good Times. Then we get the biggest unemployment crisis in a lifetime, and the delinquency rates should have spiked from these highs into the sky. But the opposite happened – as shown by the three red columns in the chart below, marking the change in percentage points of the delinquency rate compared to the same month in a year earlier: So what’s going on here. Stimulus payments and the extra $600 a week in unemployment insurance. With these funds, many strapped households had more money than they did while working. A study by the Becker Friedman Institute for Economics at the University of Chicago found that two-thirds of the people who received unemployment insurance, including the extra $600 a week, made more from UI than from working, with about 20% of them doubling their pay. And they could make their car payments, even if they had trouble making them before. The extra $600 a week expired in July, but these are 60-day delinquencies as of the end of August – so they were 30-day delinquencies in July and transitioned into delinquency in June. And during those months, the $600 was still available. And the stimulus payments of $1,200 per adult, or $2,400 per household of two adults – and more when they’re are kids in the household – started going out in April and went a long way in helping make car payments over the next few months. The $600-a-week program has now been replaced by $300 a week, and the first lump-sum catch-up checks, covering several weeks, already went out. This program is going to run out of funds in September. But for now, it’s doing its magic. Loan deferrals – no payment, no problem. When a borrower cannot make the car payment and becomes delinquent, a lender has a choice: Either work with the customer, or repossess the car, sell it at auction, use the proceeds to cover part of the outstanding loan, and write off the rest of the loan. That can get costly. The cheaper-for-now route is to work with the customer by putting the loan – whether it’s already delinquent or getting ready to be delinquent – into a deferral program. This kicks the can down the road. Deferral means that borrowers are allowed to not make payments for now, but will have to make payments later, including those payments that had been missed. It’s not a free ride. But for now, it doesn’t matter how impossible it will be for the borrower to catch up later. Because the loan is in a deferral program, the lender can mark it as “performing,” and accrue the interest income though the borrower is not making payments, and the lender can thereby “cure” a delinquency already on its books, or avoid one. The customer doesn’t have to make payments while the loan is in deferral. And everyone is happy. Bank regulators normally frown on deferral programs, but this is a pandemic, and now regulators encourage deferral programs. The finance divisions of the automakers, such as Ford Motor Credit or Chrysler Capital, most banks and credit unions, and specialized auto lenders with a big percentage of subprime customers, such as Ally and Santander Consumer USA, have been offering large-scale deferral programs to existing borrowers. If a borrower falls behind on a payment, there is now a lender on the other side, eager to kick that can down the road and move this loan from the delinquency basket into the deferral basket – and thereby “curing” the delinquency and turning it into a performing loan. And then what? Well, OK, that’s a little bit of a problem. When these policies were implemented in March and April, the expectation was that by summer most of those people would be back at work, that this was a temporary blip. Many people were in fact able to go back to work, but other people have since lost their jobs, and the number of people claiming state and federal unemployment insurance has hovered near 30 million for months: In other words, this unemployment crisis has settled in. Most of those initial deferral programs were for three months. But they can be extended to six months or whatever – the classic “extend and pretend,” but on a massive national scale. The only thing that’s hard about “extend and pretend?” Getting out of it. But this is now an essential cog in the bizarre machinery of an economy that depends on consumer spending funded by stimulus money and by consumer debt that is not being paid. Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how: Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.