Foreign demand for long-term US assets picks up

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Demand for long-term US assets from foreign-based investors rose in February, according to data released by the Treasury department yesterday.

Investors sought more US agency and corporate bonds and reduced their purchases of equities. Flows were driven by investors based in the Caribbean and Cayman Islands, a locale for hedge funds. US investors, meanwhile, sharply increased their holdings of foreign equities and sold fixed income assets.

The pick-up in demand came before the near collapse of Bear Stearns in March and heightened volatility across markets. For now, worries that the slumping dollar and credit crunch would hurt the ability of the US to finance its current account have receded.

“Buying in US debt has improved from the trough of last summer but is modest versus 2006 and the first half of the 2007 period,” said David Ader, bond strategist at RBS Greenwich Capital.

The Treasury International Capital (Tic) report showed that net foreign acquisition of long-maturity US securities reached $60.1bn in February, up from $42.2bn in January. Excluding non-market flows, net buying of long-term securities in the US was $72.5bn, up from $57.1bn the prior month. Analysts had expected inflows in the region of $60bn for February.

A more comprehensive measure of investment sentiment, which includes non-market flows, known as monthly net Tic flows, showed that net foreign capital inflow totalled $64.1bn in February, up from $35.7bn during January.

“The combination of increased US investment abroad and foreign buying of US bonds in January and February reflects a return towards normal cross-border investment patterns with respect to long-term securities,” said analysts at the Bank of New York.

“The explanation may be that foreign demand for longer-term US securities reflects the return of Asian central banks and Middle Eastern oil exporters, masking renewed deterioration in confidence and increased liquidity needs among private sector investors.”

A breakdown of the Tic flows showed that foreign investors bought a net $24bn in US Treasury notes and bonds, after net sales of $85bn in January, and central banks sold a net $3.6bn of government debt after net purchases of $36.1bn.

The purchase of agency bonds jumped to a net $36.9bn from $19.3bn, and corporate bonds totalled a net $19.3bn in February, up from $4.2bn in January. The net foreign purchase of US equities fell to $6bn in February, down from $17.8bn.

At the same time, US investors bought a net $15.8bn in foreign equities, up from $2.9bn in January, while they sold a net $5.6bn of foreign fixed income securities after the net purchase of $17.2bn.

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