The beginning of an ugly trend?

The traditional argument is that the US is king and you'd have to be crazy not to invest on our shores. But, right or wrong, we may be on a new trend: it looks like foreign investors may be truly shying away from America which means corporations are losing bond money which is "scary" in an already credit-tightening environment.


Foreign investors flee US securities
By Michael Mackenzie in New York

Published: October 16 2007 17:07 | Last updated: October 16 2007 21:16

Foreign investors slashed their holdings of US securities by a record amount as the credit squeeze intensified, according to the latest Treasury figures.

The Treasury International Capital report – known as the Tic – for August will be closely watched because it appears amid growing concerns about the weakness of the US dollar, which hit a record low recently against a basket of major currencies.

“The bad news is that [the data] plainly show how vulnerable the dollar is to a continuation of the credit crunch-risk averse environment,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital. “There is no way to get away from the lack of corporate bond inflows, the foreign selling of US equities and the countervailing strong US purchases of foreign equities and bonds.”

The Treasury said net sales of US market assets – including bonds, notes and equities – were $69.3bn in August after a revised inflow of $19.5bn during July. The August outflow exceeded the previous record decline of $21.2bn in March 1990.

Until now, US policymakers have appeared relatively relaxed about the dollar’s decline, since there has been little sign to date that this has been been triggered by a broader global aversion to US assets. However, that attitude could change if signs emerge in the coming months that non-US investors are becoming more nervous about holding dollar assets, as a result of the recent credit squeeze.

Some analysts said on Tuesday that the August data might turn out to be an aberration, since it occurred during the most intense period of this summer’s credit squeeze – when investors were arguably most uneasy about the market outlook. Consequently, some said they hoped that the outflows will have been reversed in September.

“There was clear panic-selling of equities in August, but given the market’s subsequent rebound, those flows should have reversed,” said Dominic Konstam, head of interest rate strategy at Credit Suisse. “If foreign investors return to buying equities, it is not obvious that there will be a capital flight from the US that will lead to a dollar crisis.”

However, others suggested that the scale of swing in August indicated that more fundamental pressures were now bubbling – not least because the dollar continued to decline in September.

The dollar was generally firmer on Tuesday after traders digested the Treasury data. The dollar index was 0.2 per cent higher at 78.25, but that is only 0.8 per cent above its record low set late last month. The dollar was up 0.3 per cent against the euro, but was 0.6 per cent lower against the yen.

Since August 1998, Tic flows have been positive and the last period of pronounced outflows was in the early 1990s when the current account deficit was briefly eliminated.

A breakdown of the data showed that one key reason for the outflows was that there were net foreign sales of US equities of $40.6bn in August, more than reversing the purchase of $21.2bn in July. Reflecting the pressure on US markets and the dollar, US residents purchased a net $34.5bn of long-term foreign securities.

In the debt world, there were net sales by foreign investors of US corporate bonds – but overall holdings of US government debt remained relatively balanced.



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