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Economy in Brief

Balance of Payments Capital Flows Rebound in Q1 -- Both in and Out of the U.S.
by Carol Stone June 18, 2010

The financial account portion of yesterday's balance of payments report shows sizable capital flows both in and out of the United States in Q1. U.S. assets abroad increased on net by $300.8 billion in the quarter, following a tiny $8.7 billion in Q4 (revised substantially from $99.1 billion reported before). The small Q4 amount occurred in government accounts, reflecting more liquidation of the Federal Reserve's currency swap program. Private investors had continued investing abroad in Q4, though by a smaller amount than before, $55.8 billion. They increased their net purchases of assets aboard by $309.6 billion in Q1, including larger direct investment outflows and a swing in banks' claims on foreigners from liquidation in Q4 to a sizable gain in Q1.

Foreign investment in the U.S. picked up in Q1, to $332.1 billion following more restrained inflows in Q4 of $103.4 billion. The increase in Q1 was in "other" investment, that is, not official assets. These, mostly private, investments accelerated to $257.0 billion after a liquidation of $13.2 billion in Q4. Net purchases of U.S. Treasury securities by this group surged by $105.4 billion in Q1, in contrast with the slim gain of $13.8 billion in Q4 and net liquidations the prior two quarters. Banking activity increased $88.6 billion, turning around from a $63.8 billion liquidation in Q4. Foreign official assets in the U.S. increased $75.0 billion in Q1, somewhat less than their $116.8 billion gain in Q4. Official purchases of Treasuries eased to $89.1 billion from $124.4 billion in Q4. Overall, foreign buying of Treasuries amounted to $192.4 billion, up from $139.6 billion. The largest quarter ever for this item is Q4 2008, which saw $279.5 billion in foreign purchases.

In the first graph here, we show the financial flows in and out of the U.S. financial system. The balance of payments data have the convention of showing capital outflows with a minus sign, and in graphing U.S. assets abroad here,  we multiplied them by -1 to put them on the same side of the axis as foreign assets in the U.S. We see there that flows in both directions are currently running along the same general tracks. In the second graph, we show total foreign purchases of Treasury securities; this comes in the BOP array as the sum of official purchases and other purchases of Treasuries. We compare that with the total net increase in Treasury securities from the Flow-of-Funds data. Despite impressions from press reports, foreign investors have not been buying up every last Treasury bill, note or bond -- domestic investment in them is in fact quite large

The summary of Balance of Payments data is included in Haver's USECON database, with further detail in USINT. The flow-of-funds data is in the FFUNDS database.

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