Wednesday, March 18, 2009

Flight From US Treasuries

Foreign investors cut their holdings of US long-term securities in January although China and Japan purchased more Treasury bonds, according to data released by the Treasury on Monday.

The latest Treasury International Capital report, known as Tic, revealed net sales of $43bn in long-term US securities in January, following purchases of $34.7bn in December.

US residents purchased a net $24.2bn of foreign securities, the first net buying since last June as repatriation flows halted.

Foreign net purchases of US Treasury notes and bonds totalled $10.7bn in January, down from net purchases of $15bn in December.

While private foreign investors bought a net $12.7bn in Treasury notes and bonds, official institutions sold a net $1.9bn as Treasury yields rose sharply in January from record lows.

China at $739.6bn, up from $727.4bn, and Japan at $643.8bn, up from $626bn, remained the largest foreign holders of Treasury debt in January.

“Countries far more important to the ultimate direction of interest rates were net buyers of Treasuries in January,” said Tony Crescenzi, strategist at Miller Tabak.

Selling was widespread across other fixed-income asset classes.

Foreign investors sold a net $22.5bn of agency debt, issued by Fannie Mae and Freddie Mac, which was less than the $37.4bn in sales during December.

Net foreign sales of corporate bonds in January reached $8.4bn after the purchase of $41bn in December.

Net foreign purchases of US equities fell to $1.4bn, down from $3.9bn of purchases in December.

A key measure of net foreign capital outflow for the US, “monthly Tic flows” was a record negative $148.9bn in January after an inflow of $86.2bn in December.

The big reversal in January was not accompanied by a drop in the dollar. The dollar index rallied nearly 6 per cent in the month, marked by a notable decline in the euro.

Alan Ruskin, strategist at RBS Greenwich Capital, said: “Sizeable net long-term outflows, with very weak net short-term inflows would normally smack of dollar weakness.” One way to explain the dollar’s strength in January may be the role played by dollar swap lines set up by the Federal Reserve. In January, the Fed’s balance sheet showed a contraction of $115bn in dollar swap lines with other central banks.

Traders said this may explain how the drop in net dollar liabilities had not unsettled the dollar.

Source - Financial Times


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