Foreign Investors Look for Safe Bets in U.S. Securities

Money

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Foreign residents increased their holdings of U.S. securities in July, according to the Treasury International Capital report. The U.S. Treasury reports net foreign purchases of U.S. securities and banking inflows by all foreign investors — both private and public — of $194.9 billion for October. Of this, 95 percent were private inflows and 5 percent were from foreign governments.

The financial landscape in the United States has been somewhat dubious in the wake of the 2008 crisis, but foreign investors seem to buy into the bull thesis that many domestic investors hold and appear eager to participate in the U.S. markets. Net purchases by private foreign investors were $59.4 billion in October, although foreign officials logged a net sale of $4.7 billion.

U.S. residents purchased $19.2 billion worth of long-term foreign securities in October, meaning that once again, there was more foreign investment in U.S. longer-term securities than there was U.S. investment in foreign longer-term securities. Net foreign purchases of longer-term securities was $3.4 billion for the month, or $23.9 billion after adjusting for things like unrecorded principal payments.

The TIC tracks the flows of financial instruments such as Treasury securities, agency securities, corporate bonds, and corporate equities in and out of the United States. Broadly speaking, the TIC provides a measure of foreign demand for U.S. debt and assets. Strong inflows will put downward pressure on interest rates and help maintain a strong dollar.

Keep in mind that the data are released with about a two-month lag time, but the information still relevant because of its impact on bond and foreign exchange markets. Given the relatively low levels of foreign ownership of U.S. equities, the report is not as relevant to equity investors.

TIC data can have a direct impact on interest rates in the U.S. as well as the value of the dollar. The yield on the 10-year Treasury note fell slightly following — not necessarily because of — the news. Interest rates are also sensitive to changes in monetary policy, and many investors are suspicious of the Federal Reserve’s monetary strategy.

All told, foreigners own approximately $5.6 trillion in Treasury securities, or about 47 percent of the debt held by the public.

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