Foreigners turn to U.S. stocks

November 16, 2010, 9:39 PM UTC

Foreign funds continued to flood into the United States in September, as big Asian creditors added to their government bond holdings.

Net foreign purchases of U.S. long term securities were $81 billion in September. That’s down from $137 billion in August, as overseas buyers slowed their purchases of Treasury bonds. Net foreign Treasury purchases fell by more than half in the latest month.

Consider your boat lifted

But overseas investors also stepped up their pace of stock purchases, suggesting that the hope of an imminent U.S. economic recovery remains alive.

“This shift illustrates investors’ confidence about U.S. recovery prospects,”   said IHS Global Insight economist Gregory Daco. “Looking forward, the composition of long-term foreign investments into the U.S. will depend on which of the following two forces dominates. On one side, stronger growth evidence in the U.S. will prop up demand for equities, while on the other the resurgence of sovereign debt worries in Europe will lead foreign investors back into safe haven U.S. Treasuries.”

The monthly Treasury International Capital report is sifted first and foremost for evidence that China might be edging away from its support for our overspending habit. But the latest data show nothing of the sort is happening, and may indeed suggest that investors are betting on a U.S. recovery by shifting out of bonds and into stocks.

Foreign investors bought $39 billion of Treasuries, $23 billion of bonds issued by government agencies such as Fannie Mae and Freddie Mac, and $22 billion of stocks – nearly doubling their equity purchases of the past three months combined.

The shift came as Fed officials signaled their intent to provide more support for the economy by buying Treasury bonds in a bid to prop up asset prices and weaken the value of the dollar. So far, so good on that plan, in spite of all the yelling to the contrary.

“The trade deficit continues to exert downward pressure on the dollar, making U.S. securities very attractive to foreign investors,”said  Daco. “The combination of a weak dollar and slow growth prospects in Europe and Japan (despite a surprisingly strong third quarter) should continue boost demand for U.S. securities.”

Among the biggest buyers of U.S. securities in September were, as usual, China and Japan. China bought a net $15 billion of Treasury securities in its official account, bringing that globe-leading tally to $883 billion. Buyers in the U.K., believed to be acting at least in part on China’s behalf, added $9.6 billion.

Japan, meanwhile, added $28 billion of Treasury debt, giving it $865 billion worth.