Foreign Demand for U.S. Long-Term Assets Declines in October

By John Brinsley

Dec. 15 (Bloomberg) -- International demand for long-term U.S. financial assets weakened in October as foreign investors sold American stocks, corporate bonds and agency debt.

Total net purchases of long-term equities, notes and bonds fell to a net $1.5 billion in October from $65.4 billion the previous month, the Treasury said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $286.3 billion, compared with net buying of $142.6 billion the previous month.

U.S. equities fell the most in 21 years in October as concern about a widening global economic slowdown spurred demand for Treasuries. In October, foreign investors sold a record amount of debt issued by mortgage-finance companies Fannie Mae and Freddie Mac and other agencies.

“Interest in equities are weak and corporate demand is drying up,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, before the report. “More money is staying at home.”

Economists predicted international investors would buy a net $40 billion of long-term securities in September, based on the median of five estimates in a Bloomberg News survey.

The Standard & Poor’s 500 Index fell 17 percent in October, with the sell-off erasing more than $9.5 trillion in value of stocks worldwide. The Fed cut its benchmark rate to 1 percent on Oct. 29, its second reduction in three weeks, and said downside risks to growth remain.

Fannie, Freddie

The Treasury’s reporting on long-term securities captures international purchases of government notes and bonds, stocks, corporate debt and securities issued by U.S. agencies such as Fannie Mae and Freddie Mac, which buy mortgages.

Foreign purchases of Treasury notes and bonds increased by a net $34.6 billion, compared with purchases of $20.7 billion a month earlier. Net foreign official selling of Treasury bonds and notes totaled $1.1 billion, after net purchases of $4.9 billion the previous month.

Two-year securities returned 1.1 percent in October, according to Merrill Lynch & Co.’s Treasury Master Index, for their fifth straight monthly advance.

Foreign demand for U.S. agency debt from companies such as Fannie Mae and Freddie Mac fell from a month earlier. Sales of long-term agency debt totaled a net $50.2 billion, compared with net purchases of $6.2 billion in September.

The Treasury’s figures include both agency debt and mortgage-backed securities and aren’t restricted to Fannie Mae and Freddie Mac bonds. Mortgage-backed securities of Ginnie Mae and corporate debt of the Federal Home Loan Bank System are also included in the report.

U.S. Selling

U.S. residents sold a net $36.3 billion of long-term foreign securities in October, compared with net sales of $35.4 billion a month earlier, the report showed.

China remained the biggest foreign holder of U.S. Treasuries, after its holdings rose by $65.9 billion to $652.9 billion. Japan, the second-largest holder, increased its holdings by $12.3 billion to $585.5 billion.

The U.K., which through London acts as a transit point for international investors, especially those in the Middle East, bought $21.9 billion of Treasuries, bringing holdings to $360.2 billion.

Caribbean banking centers, where many hedge funds are based, expanded holdings by $34.2 billion to $219.5 billion, the report showed.

Some economists say the difference between the trade deficit and securities purchased by foreigners is an indicator of how easily the U.S. can finance its external obligations.

The U.S. trade gap unexpectedly widened 1.1 percent in October to $57.2 billion as faltering global demand led to a third consecutive drop in exports, the Commerce Department said on Dec. 11.

To contact the reporters on this story: John Brinsley in Washington at jbrinsley@bloomberg.net