Watchman Newsletter

Foreign investors scoop up US debt

Financial Times (Link) - Michael Mackenzie (October 18, 2010)

Foreign investors scooped a near record amount of US debt in August and sharply increased their holdings of Treasury bonds, according to the latest Treasury International Capital report.

August was marked by fears that the US economy faced a possible double dip recession and yields on Treasury bonds fell sharply as bond investors priced in a move by the Federal Reserve to start another round of quantitative easing. The Fed announced in August that it would start reinvesting principal payments from its agency debt and agency mortgage-backed securities in longer-term Treasury securities.

Since the Fed�s policy meeting in September, investors have grown more confident that further easing, QE2, will be announced at the Fed�s next policy meeting in early November. In turn, the dollar has weakened sharply, particularly against the yen and a number of emerging market currencies.

Analysts say the prospect of QE2 should keep money flowing into US debt and the recent fall in the dollar should boost inflows as some countries intervene in the market and buy the US currency.

�The TIC data in the future will reflect strong foreign demand due to currency intervention,� said George Goncalves, head of interest rate strategy at Nomura Securities. �The question is where those funds are invested and I expect it will favour short-dated bills rather than longer-term maturities.�

The TIC report disclosed that foreign holdings of dollar-denominated short-term US securities, including Treasury bills, and other custody liabilities increased $29.7bn in August, with foreign holdings of Treasury bills rising $29.1bn.

Net purchases of US long-dated securities more than doubled to $128.7bn in August from July�s $61.2bn. Purchase of Treasuries surged to a net $117.1bn, up from $30bn in July, and represented the heaviest buying of US government debt since last November.

�August reveals a near record amount of debt buying, with Treasury coupons the strong performer from both private buyers and central banks,� said David Ader, strategist at CRT Capital.

The UK was the biggest buyer of Treasuries at $74.1bn during August, followed by China, Belgium and Japan.

Overall, China remains the biggest holder of US Treasury debt. It increased its holdings by $21.7bn to $868.4bn, but is below its peak for this year of $900bn in April. Japan purchased a net $15.6bn in August and remains the second-largest foreign holder of Treasury debt at $836.6bn. �

America ~ Economic Crisis