RealMoney Silver - Foreigners Avoided Bonds in July

Foreigners Avoided Bonds in July
By Tony Crescenzi
RealMoney.com Contributor
9/18/2007 10:34 AM EDT

Given the sharp widening of credit spreads that occurred in July and the large presence that foreign investors have in the U.S. credit markets, it should be no surprise that foreign investors significantly cut back on purchases of U.S. fixed-income securities in July, as seen in today's data on international capital flows released by the U.S. Treasury department.

The Treasury department's data show that net foreign purchases of long-term U.S. securities were just $19.2 billion in July, well below the previous month's tally of $97.3 billion, which was revised downward substantially from the previously reported figure of $120.9 billion and was $66 billion below the consensus forecast. The July figure was also well below the monthly average of $65 billion seen over the past five years.

On the flip side, net foreign purchases of all U.S. securities were much stronger than expected, jumping to $103.8 billion from $34.4 billion in June, above the consensus forecast for a total of $60 billion.

The net figure includes short-term securities, which means that in July foreign investors were scaling out of long-term securities such as corporate bonds, favoring short-term obligations such as agency bills and equities, which saw a fairly sturdy inflow.

July was when credit spreads spiked higher, and rather than sell out completely foreigners sought shelter in short-term securities. In August, foreigners were likely also selling short-term securities, as indicated by the poor performance of short-term securities during the month. For reference, note that short-term securities include T-bills, agency bills, commercial paper, and certificates of deposit.

Net foreign purchases of corporate bonds predictably saw weakness in July, falling to just $4.1 billion compared to $25.9 billion the previous month and an average of $36.5 billion of the past three years. The tally was the lowest since September 2002. Similar weakness might have occurred in August, when credit spreads continued to widen.

Net foreign purchases of agency securities fell to $8.66 billion, the least since February and well below the average of $21.6 billion of the past three years.

Net foreign purchases of U.S. equities were $21.2 billion compared to $28.8 billion in June and an of $11.9 billion over the past three years.

Net foreign purchases of Treasuries were -$9.4 billion, the first net sale since April 2006 and the most since January 2002. China was a net buyer for the first time in four months, with a net purchase of $2.7 billion (China's holdings are now $407.8 billion). The prior three months were the first such string of net sales in almost seven years. Japan was a net seller; it has been for four years when its holdings peaked at $699 billion (now at $611 billion). Japan sold $2.3 billion. Hedge funds were apparently sellers; net purchases by Caribbean banking centers were -$7.4 billion.

In general, the diversification theme held up in July and it accelerated owing to weakness in U.S. markets.

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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