Oct. Foreign Holdings of U.S. Assets Rise to a Record (Update2)
Dec. 15 (Bloomberg) -- International investors increased their net holdings of U.S. assets in October at a record pace as strong growth and rising interest rates lured funds to the world's largest economy.
Net holdings of Treasury notes, corporate bonds, stocks and other financial assets increased $106.8 billion, exceeding September's revised $101.7 billion record, the Treasury Department said in Washington today. October's net gain was almost twice the $54.4 billion monthly average for the last five years.
The U.S. economy grew at more than twice the rate of its European rivals in the third quarter. Rising U.S. interest rates helped the dollar rally against the yen and the euro this year and attracted capital to the U.S., helping to fund a burgeoning trade gap.
``These numbers show that foreign buying of U.S. assets is enough to finance the trade deficit,'' said Marc Chandler, chief global currency strategist at Brown Brothers Harriman & Co. in New York.
The trade deficit was a record $68.9 billion in October, the Commerce Department reported yesterday.
The dollar rose against the euro and pared a decline versus the yen after the Treasury's report. In euro trading, the dollar advanced to $1.1951 at 10:34 a.m. in New York from $1.1999 late yesterday, according to electronic foreign-exchange dealing system EBS. The dollar traded at 116.48 yen from 117.39.
Economists surveyed by Bloomberg News predicted a net increase of $75 billion in international holdings in October, the median of five estimates.
Hedge Funds, OPEC
Caribbean banking centers, which some analysts tie to hedge funds, increased their holdings of U.S. debt by a net $10.6 billion and the Organization of Petroleum Exporting countries boosted their holdings by $9.2 billion. China and Japan each reduced their holdings of U.S. Treasury securities in October.
The U.S. economy grew by 3.7 percent in the third quarter from a year earlier, faster than any country in the Group of Seven industrial nations. Japan grew by 2.9 percent, and France, the U.K. and Germany all expanded by less than 2 percent. Canada grew 2.8 percent.
Investors monitor the Treasury data as a gauge of demand for dollars. The currency swung by about an average of three-quarters of a cent against the euro on the day of each monthly report in 2004.
``The backdrop of solid growth and relatively low inflation has kept the demand for US financial assets incredibly robust,'' said Joseph A. LaVorgna, chief fixed-income economist at Deutsche Bank Securities Inc. in New York. ``The buying was strong across all major asset classes.''
Corporate Securities
Foreign investors were confident enough to invest in U.S. corporations even as U.S. stock indexes trailed some other countries' benchmarks. The Standard & Poor's 500 Index fell 1.8 percent in October while Japan's Nikkei 225 Stock Average rose 0.24 percent. Overseas investors added to net stock holdings by $10.6 billion, while demand for U.S. corporate bonds rose by a net $34.1 billion.
The total net figure in today's report comprises Treasury notes and bonds; debt of so-called agencies such as Fannie Mae and Freddie Mac; corporate bonds and stocks; and the stocks and bonds of foreign companies bought from U.S. investors. The report is one measure of U.S. capital flows and doesn't include foreign direct investment and bank deposits.
Total purchases of domestic securities were $1.47 trillion in October, while total sales were $1.36 trillion.
Treasuries
Purchases of Treasury securities rose by a net $30.4 billion, while demand for agency debt increased by a net $35.2 billion.
U.S. Treasury Secretary John Snow said yesterday there is ``no reason to be concerned'' about the high level of foreign investment in the U.S.
``People invest in the U.S. because the U.S. is the best place to invest,'' Snow said in an interview. ``It's just a reflection of their confidence in the U.S. markets.''
Investors abroad held $2.1 trillion of the $4.11 trillion marketable U.S. Treasury securities outstanding during the month, according to Treasury figures. Excluding the foreign bonds and stocks, the total investment in long-term domestic securities was $110.3 billion in October, with private foreign investment accounting for $97.3 billion of that. Central banks and other agencies accounted for the rest.
Private Demand
``Another month of strong private demand for U.S. securities and subdued official purchases should continue to dispel thoughts that the dollar is being artificially supported by Asian central banks,'' said David Powell, a currency analyst at IDEAglobal in New York.
U.S. interest rates are higher than in most industrial countries, making U.S. assets more attractive. Among major central banks, only the Bank of England, at 4.5 percent, had a higher benchmark interest rate in October than the U.S. Federal Reserve's 3.75 percent. The official target rates of the European Central Bank, the Bank of Canada and the Bank of Japan were all lower. The ECB and the Canadian central bank raised their main rates this month, although they remain below the U.S. rate, which the Fed increased to 4.25 percent two days ago.
Current Account
The U.S. needs foreign capital to fund its current-account deficit, the broadest measure of trade because it includes investment income and transfers. The deficit rose to a record $394.3 billion in the first half of this year from $312.7 billion a year earlier.
``There's no question the trade deficit is important, but it's not the only number,'' Carlos Gutierrez, the U.S. Commerce secretary, said yesterday. ``It's not a proxy for the economy, not the indicator for the health of the economy.''
The U.S. budget deficit in the fiscal year ended Sept. 30 fell to $318.6 billion, the third highest ever, from last year's $412.8 billion.
Better growth in European countries may increase their appeal to international investors.
``German companies continue to be in a phase of restructuring, focusing on costs,'' said Carsten Klude, head of strategy at M.M. Warburg in Hamburg. ``We expect the economy to do well. All in all, profits should significantly rise again next year.''
China, Japan
Japan, the largest foreign holder of government securities, sold a net $5.7 billion in assets in October. China sold a net $4.6 billion in U.S. debt. Japan accounts for $681.6 billion of Treasuries held by overseas investors, followed by China with $247.6 billion and the U.K. with $187.1 billion.
China had been buying dollars to ensure its currency, the yuan, stayed at about 8.3 to the dollar. China's government ended the peg in July, allowing the yuan to appreciate by around 2.1 percent against the dollar. Greater flexibility in China's currency policies may result in fewer purchases of U.S. securities over time.
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