Tuesday, March 15, 2005

"Mirror, mirror, on the wall, who's the fairest capital importer of all?"

"It is thou, O Red Ink, who is the fairest of all. Why, which economy could compare to your rising interest rates on short-term Treasuries, your 4.0% GDP growth, and your tireless consumers who laugh at recession and throw all caution to the wind?"

And Red Ink went away happy with the answer from her mirror, pleasantly weighed down by an extra $91.5bn in pocket.
Investors purchased a net $91.5 billion in Treasury notes, corporate bonds, stocks and other financial assets in January, up from $60.7 billion in December, the Treasury Department said today. The total was the second highest behind the $103.9 billion in May and shows that record current-account and budget deficits haven't soured foreigners on the world's biggest economy.

``It shows people are still finding value in the U.S. and that the U.S. is a good place to put their money,'' said George Goncalves, a fixed-income strategist in New York at Banc of America Securities LLC.
In October 2004 we all had a little scare when net foreign purchases of long-term US securities was a mere $49.5bn, nowhere near enough to balance monthly trade deficits pushing $60bn. However, since that scare the US has attracted net $89.5bn, $60.7bn and now a big $91.5bn, making October just a bad memory.

Rising short-term interest rates have made US Treasuries a tasty dish once again. 1-year bills rose from 2.58% at the start of December to 2.96% by the end of January; 3-years from 3.12% to 3.45%; and 10-years from 4.09% to 4.33% before their popularity dropped them back down to 4.14%. In turn, in January net foreign treasuries purchases leapt to $30.7bn after December's disappointing $8.4bn.

US equities became wildly popular among foreign jet-setters in January. They bought net $16.5bn of them, the highest monthly tally since May 2001. At the same time, American jet-setters stopped buying foreign securities in January, cutting the net foreign securities purchased total to a mere -$1.1bn mostly on the back of Americans' new-found love for domestic assets. They dumped low-yielding foreign bonds to the tune of $5.5bn in net sales to foreigners, the first time that figure was positive (indicating net sales of foreign bonds by Americans rather than net purchases) since May 2004.

In turn, agency and corporate bond purchases slacked off some from their blistering end-of-2004 pace. That doesn't mean that interest rates on these securities have budged an inch, however.



As the chart above shows, corporate borrowing rates are still falling, and the 1-year ARM remains stuck around 4.1%. Until these rates begin to climb, don't look for any change in the pattern we're in now. Monthly trade deficits will climb well into the -$60bns, financing will continue to flood in, and Nouriel Roubini's and Brad Setser's day of reckoning will continue to be delayed at least through the first half of 2005 if not all year.

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