International Demand for Long-Term U.S. Assets Falls

By Vincent Del Giudice

July 16 (Bloomberg) -- International demand for long-term U.S. financial assets weakened in May as Russia, Japan and Caribbean banking centers trimmed their holdings even as China stepped up its purchases.

Total net sales of long-term equities, notes and bonds were a net $19.8 billion in May, compared with buying of $11.5 billion the month before, the Treasury said today in Washington. Monthly foreign investment flows dropped $66.6 billion in May, compared with a decline of $38 billion in April.

While Treasuries have been a haven for investors during the credit crisis, emerging economic powers question the dollar’s status as the U.S. runs up record debt to fund the economic recovery. At a Group of Eight summit last week in Italy, China repeated calls for a “diversified and rational” global currency regime. Russian and Brazilian officials said the issue may come up at the wider G-20 forum in Pittsburgh in September.

“We still need the foreign capital,” David Wyss, chief economist at Standard & Poor’s in New York, said before the report. “We’re still borrowing. It’s important to see a significant inflow.”

China, the biggest foreign holder of U.S. Treasuries, increased its holdings of government notes and bonds by $38 billion to $801.5 billion. Holdings in Hong Kong also increased. Japan, the second-biggest international investor, reduced its total by $8.7 billion to $677.2 billion. Russia’s holdings fell $12.5 billion to $124.5 billion. Holdings at Caribbean banking centers also fell, declining by $9.9 billion to $194.8 billion.

Forecasts

Analysts had anticipated international net purchases of long-term U.S. assets of $16.5 billion, according to the median of five estimates in a Bloomberg News survey.

Including bills, foreign holdings of U.S. Treasuries rose a net $30.5 billion.

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 home mortgages.

Foreign investments in U.S. agency debt increased by $12.8 billion in May. Net purchases of American equities rose $16.7 billion in May after rising $4.6 billion the prior month. Holdings of corporate bonds increased a net $935 million.

Record Deficit

The U.S. budget deficit topped $1 trillion for the first nine months of the fiscal year and broke a monthly record for June as the recession subtracted from revenue and the government spent to rejuvenate the economy.

The shortfall for the fiscal year that began Oct. 1 totaled $1.1 trillion, the first time that the gap for the period surpassed $1 trillion, Treasury figures showed July 13 in Washington. The excess of spending over revenue for June was $94.3 billion, the first deficit for that month since 1991, according to data compiled by Bloomberg.

For the fiscal year that ends Sept. 30, the Office of Management and Budget forecasts the deficit to reach a record $1.841 trillion, more than four times the previous fiscal year’s $459 billion shortfall.

Chinese Premier Wen Jiabao expressed concerned earlier this year that his country’s Treasury holdings may fall in value as the U.S. sells record amounts of debt to fund the budget gap.

President Barack Obama is counting on nations such as China to fund his $787 billion economic stimulus and separate programs to aid financial firms and homeowners amid the worst downturn since World War II, which has cost about 6.5 million jobs.

Geithner Trip

Treasury Secretary Timothy Geithner has sought to reassure investors such as China that their investments in Treasuries are safe, while also seeking to reassure U.S. voters that the government has a plan to get its debt under control.

Geithner, concluding his first trip to the Middle East, yesterday said the Obama administration favors a strong dollar and expressed confidence it will stay the world’s main reserve currency.

“It is the policy of the United States and it will remain the policy of the United States to remain committed to a strong dollar,” Geithner said in an interview with Al-Arabiya television. “My view, and this is the view I heard expressed here,” is that the dollar “will remain the principal reserve currency,” he said.

China Holdings

Meanwhile, a People’s Bank of China economist wrote in the China Securities Journal yesterday that China should “moderately” increase its holdings of U.S. Treasuries and purchases this year should not be lower than the total for 2008.

The holdings can be trimmed and purchases of other types of U.S. assets stepped up once the American economy recovers, Wang Yong, a professor at the central bank’s Zhengzhou-based training school, wrote in an article in the Xinhua News Agency-affiliated newspaper.

China and other nations with large dollar reserves should hold negotiations with the U.S. government on how those funds can be injected into the world’s largest economy, and those talks should include the possibility of shifting bond holdings into other assets such as stocks and gold, Wang wrote.

Russian President Dmitry Medvedev who first questioned the dollar’s future last month, saying it isn’t “in a spectacular position, let’s be frank, and its prospects cause various questions,” handed out coins at the July 10 G-8 meeting in Italy bearing the words “united future world currency.”

To contact the reporters on this story: Vincent Del Giudice in Washington at vdelgiudice@bloomberg.net