Tuesday, November 16, 2004

The latest Treasury International Capital System report is out today. What did foreign capital and foreign central banks think of US investment opportunities in September? Let's check in and see . . .

Foreign capital absolutely loved US corporate bonds, gobbling up $44.6bn worth of them. This was the largest monthly purchase on record. It's probably not just coincidence that interest rates on corporate bonds fell almost 20 basis points in September (thanks to high supply?).

Both foreign capital and central banks returned to buy US treasuries. Foreign private capital bought $9.9bn in treasuries after dumping them in August. Central banks bought $10.1bn. While the $19.2bn overall was a marked turnaround from August, August and September still come in as the lowest two months of the year. Souring on t-bills seems to be the overall theme.

US government agency bonds -- mostly Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities -- took an unexpected tumble. Central banks bought just $2.0bn worth, and foreign private capital actually sold them to the tune of $1.3bn. The overall total for September came out to just $956m in net agency bond purchases, the lowest since September 2003 and the second-lowest since October 1998.

Finally, foreign capital thought US stocks sucked in September, selling net $3.8bn. This marked the second month in a row and the fifth of the last seven months to show foreign capital fleeing the US stock market.

Overall net capital flows into the US ticked up slightly, from $59.9bn in August to $63.4bn in September. A big shift in private capital's appetite for US corporate bonds kept the dollar propped up without any need for support from the Bank of Japan and the People's Bank of China.


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