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- The New York Times – Floyd Norris: Foreign Investors Trade Safe for Safest
Over the summer, prices of agency securities fell as the financial crisis grew worse and some investors began to doubt whether the “implicit” government guarantee behind the agencies could be trusted. In July and August, foreigners were net sellers of $64 billion of such securities, an outflow unlike any previously seen. That flight was one reason the government stepped in on Sept. 7 to effectively nationalize the agencies, although shares remain publicly traded. At first investors seemed reassured, but the confidence has now waned. Despite the nationalization, the government has stopped short of putting its full faith and credit behind the bonds. The new data is the first indication that may have mattered to many overseas investors. The accompanying chart at the top shows the monthly flows this year of foreign cash into Treasury securities and agency securities. More foreign money came into Treasuries in October — almost $91 billion — than in any previous month. Most of the money — $56 billion in October — has gone into Treasury bills rather than into longer-dated bonds and notes. That flow helped to push down interest rates on bills to historically low levels, sometimes even a bit below zero, as investors sought complete safety.
Comment We commented on foreign purchases of agency securities in our latest TIC Update:
Last month we viewed September’s rebound in net purchases of U.S. agency securities by All Foreigners with some skepticism. Although foreigners were net purchasers of agencies in September, we noted that the large majority of individual countries were actually net sellers. In fact, the hedge funds domiciled in the Caribbean tax haven countries were the only real group of buyers…
This morning’s release of October TIC flows shows that All Foreigners were net sellers of a record $50.22 billion for the month, as the blue bars below show.
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As the blue bars on the right chart illustrate, this net selling can largely be attributed to the $22.19 billion in net sales by the Caribbean tax haven countries.
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If recent pains in the hedge fund world are going to drive foreigners away from agency securities, another group will have to step up their net purchases to offset any further losses should foreign ownership continue to fall.
Luckily, with the holidays upon us, the U.S. government has been in a charitable mood. The Federal Reserve’s November 25th announcement to purchase $100 billion of agencies should help make up for any lost interest from foreigners. However, as is the case with any of the medicated markets, this is at best a temporary fix.