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Economy in Brief

Foreign Investors Renew Commitment to US Markets, Albeit Limited, According to New TIC Data
by Carol Stone November 16, 2007

After their exodus from US financial markets in August, foreign investors returned in September with moderate net purchases of US long-term securities. These totaled $26.4 billion, compared with August's $70.6 billion liquidation (revised from the original $85.5 billion reported).

Even as foreign investors returned, they did so in a much more limited way than earlier this year, and with a more conservative asset mix. Net purchases of domestic securities were $55.4 billion, almost half of which, $26.3 billion, were Treasuries. Both private and official foreign institutions were net buyers both of Treasuries and in total. Back in August, private foreigners had been net purchasers of Treasuries as well, but official institutions were net sellers then.

There were net purchases of all three of the other securities categories, $11.5 billion in Agencies, $15.1 billion in corporate bonds and $2.5 billion in equities. The resumption of corporate bond purchases is impressive after August's small net sales, although the amount is modest compared with a $43 billion monthly average during 2006 and $47 billion in the first half of this year. Regarding equities, it looks that the most we can say, with just $2.5 billion in purchases, is that the net selling stopped. The figures here don't show much conviction about increasing US equity positions. So foreign investors highlighted Treasury securities in their September acquisitions, but were restrained toward other, riskier securities.

Last month here, we emphasized the erratic nature of other types of foreigners' participation in the US financial system. They can buy short-term securities, including Treasury bills, or other paper, and they had done so in size in July and August, $56.2 billion and $33.9 billion, respectively. In September, however, this practice was far less extensive, as only $3.8 billion went into these assets. By then, rates on T-bills were quite low and the market for commercial paper was shrinking rapidly, making those both less attractive outlets. And as we pointed out in our summary of August data, these items are by definition transitory holdings anyway. Also, bank deposits from foreign account holders and other bank liabilities to foreigners had decreased sharply in August, and these actually continued to do so in September. Possibly the unpopular dollar is a main factor here, as traders reduce their cash in US banks when they sell dollars. Again, though, substantive explanations are hard to come by for these assets, since they too are largely short-term holdings.

So it is encouraging to see a return to net inflows to US markets from foreign investors, but the September performance still shows significant hesitation. As we also mentioned last month, this is no different from the attitudes of US investors, is it?

Net Foreign Purchases from US Residents, Bil $ Sept 2007 August 2007 July 2007 June 2007 Monthly Averages
Last 12 Months 2006 2005
"Headline": Net Foreign Purchases
= 1 + 2 + Other*
26.4 -70.6 19.5 99.9 60.8 76.2 69.9
1. Domestic Securities 55.4 -36.1 25.0 121.7 87.8 97.2 84.3
   Treasuries 26.3 -2.8 -9.4 24.7 17.3 17.3 28.2
   Agencies 11.5 8.4 8.7 39.6 21.0 24.5 18.3
   Corporate Bonds 15.1 -0.9 4.5 28.5 41.0 42.8 31.0
   Equities 2.5 -40.6 21.2 28.8 13.4 12.6 6.8
2. Foreign Securities  -29.0 -34.5 -5.5 -21.8 -27.0 -21.0 -14.4
3. Short-Term Sec's & Custody Holdings 3.8 33.9 56.2 -16.0 11.7 12.2 -4.0
4. Banks' Liabilities -24.3 -97.8 30.3 -15.4 -8.5 15.3 1.4
Total TIC Flows**  -14.7 -150.7 83.5 43.6 47.4 89.5 55.4
China 8.5 -10.1 4.5 21.2 10.0 9.7 7.4
United Kingdom -4.4 31.7 25.1 55.4 35.7 26.5 26.4
Cayman Islands 14.8 -14.7 -16.4 9.6 7.3 12.1 4.1
*"Other" includes stock swaps and repayments of capital on asset-backed securities.
**Sum of Lines 1. through 4 (plus "other" noted above. Line 1 is the sum of the security types listed immediately below it.)
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