Bloomberg: Foreigners Bought Net $48.1 Billion in U.S. Assets in October

Foreigners Bought Net $48.1 Billion in U.S. Assets in October

Dec. 15 (Bloomberg) -- International investors increased their holdings of U.S. assets in October by $48.1 billion, the smallest gain in a year, the Treasury Department said in Washington.

Combined purchases of Treasury notes, corporate bonds, stocks, and other financial assets had risen by $67.5 billion in September, more than previously reported. Higher demand in October for U.S. Treasuries, corporate bonds and stocks was offset by net sales of foreign assets held in the U.S.

The last time holdings grew less was in October 2003, when they rose by $27.5 billion. International investors and central banks complain that an unprecedented trade deficit, combined with a record budget shortfall, is making American assets less attractive and pushing the dollar to a succession of record lows against the euro. Japan's government and investors cut their holdings of U.S. Treasuries for a second consecutive month, and demand from China slowed to $300 million in net purchases.

``There is a worry that the pace of foreign inflows into the U.S. won't keep up with the swelling trade deficit,'' Ashraf Laidi, chief currency strategist at MG Financial Group in New York, said before the report. ``The trend is for diminishing demand.''

The overall net figure in today's report comprises Treasury notes and bonds, debt of so-called agencies such as Fannie Mae and Freddie Mac, corporate bonds and stocks, and the stocks and bonds of foreign companies bought from U.S. investors.

Treasury Secretary John Snow said in an interview today he was ``not concerned'' that foreign demand for U.S. assets would fade and promised to halve the budget deficit within four years. ``We have the deepest, most liquid and best capital markets in the world and we're going to keep them like that.''

Details

Total purchases of domestic securities were $1.22 trillion in October, while total sales were $1.16 trillion.

Purchases of Treasury holdings rose by $18.3 billion. Demand for U.S. corporate bonds rose by $19.2 billion.

Foreigners also had net sales of $3.2 billion in foreign bonds traded in the U.S. and net sales of $12 billion in foreign stocks traded in the U.S. Demand for U.S. agency holdings rose by $22 billion.

Investors abroad held $1.9 trillion of the $3.8 trillion in marketable U.S. Treasury securities outstanding during that month, according to Treasury figures. Private investment of long-term domestic securities rose a net $49.1 billion in October. Central banks and other agencies accounted for the rest.

Concern Over Deficits

Concern is growing in financial markets that trade, current account and budget shortfalls mean the U.S. is living beyond its means and that international demand for dollar-denominated assets may soon sour, said C. Fred Bergsten, director of the Institute for International Economics, a Washington-based research group. On Dec. 7, the U.S. currency fell to a record $1.3470 per euro.

``This gradual and orderly decline in the dollar may accelerate, turning into a freefall, and create a hard landing,'' Bergsten said yesterday. He predicted the dollar needed to fall another 15 percent to halve the trade gap.

The U.S. current account hasn't been in balance or posted a surplus since the second quarter of 1991. The shortfall grew to a record $166.2 billion in the second quarter as higher oil prices contributed to a wider trade gap. A report tomorrow from the Commerce Department is likely to show a further widening, to $171 billion, in the third quarter, according to the median forecast in a survey of economists.

At an annual rate, the current account deficit was equivalent to 5.7 percent of the $11.6 trillion economy in the April-June period, up from 5.1 percent in the first quarter.

The deficit in goods and services trade grew to an all-time high of $55.9 billion in October, and the U.S. budget deficit reached an unprecedented $412.3 billion in the fiscal year that ended Sept. 30, reports this month showed.

Euro Holdings

The Zurich-based Bank for International Settlements, which provides banking services for 120 financial institutions and central banks, said Dec. 6 that Asian central banks and members of the Organization of Petroleum Exporting Countries may be increasing their holdings of euros and selling dollars. Should that trend continue, the U.S. will struggle to compensate for the trade shortfall, the bank said.

Alan Greenspan, the chairman of the Federal Reserve, told the European Banking Congress in Frankfurt on Nov. 19 that foreign investors may tire of funding the trade gap and channel money into other currencies. Central bankers in Indonesia and Russia have said they may do just that should the U.S currency extend its drop.

Japan, the largest foreign holder of government securities, sold a net $5.1 billion in October, the second straight decline. That follows a net sale of $1.9 billion in September, which was the first drop since October 2002. Japan accounts for $715.2 billion of Treasuries held by overseas investors, followed by China with $174.6 billion and the U.K. with $140.9 billion.

Until March, Japan bought Treasuries with proceeds from yen sales it undertook to hold down the value of its currency as a way of helping its exporters. Japan hasn't sold yen since exchanging $290 billion worth of its currency for dollars in the first three months of 2004.

China buys dollars to ensure its currency, the yuan, stays at about 8.3 to the dollar, where it has been fixed for nine years. The Chinese net purchases of $300 million were the smallest a decline in February. Net purchases in September were $2.1 billion. The U.S. is encouraging China to let its currency be set instead in free markets.

Caribbean holdings, which analysts link to hedge funds located in the region, fell by $3.2 billion. They have climbed to $85.2 billion in October from $55.2 billion in January.

The Caribbean is the fourth biggest buyer of U.S. Treasuries. Richard Waugh, a managing director at Principal Global Investors in Des Moines, Iowa, said hedge funds have fickle tastes and ``the risk is that if they suddenly decided to sell their Treasuries, we could be flooded with securities.''

The Treasury Department said it will release on Dec. 17 revisions to the benchmarks for the report. They were last revised in 2001.