June 4 (Bloomberg) -- Like a highly contagious virus, fear that foreigners will dump all their U.S. Treasury securities spreads through the market at periodic intervals.

The fear is not totally unfounded. Foreigners own a little more than half of publicly held U.S. government securities, according to the Treasury Department. So if these foreigners -- both central banks and private investors -- woke up on the wrong side of the bed one morning and decided to give the Treasury portfolio the old heave-ho ... well, you can begin to understand the basis for the recurrent nightmare.

``When people say, what happens when foreigners dump U.S. securities, I say, tell me why,'' says Jim Bianco, president of Bianco Research in Chicago. ``It's never happened before'' on a long-term basis.

Sure one can find odd months -- the last time was August and September 1998 -- when foreigners were net sellers of all long-term U.S. securities. Because the Treasury's monthly international capital statistics, or TIC data, exhibit a strong seasonality, Bianco uses net purchases on a 12-month rolling basis for his analysis.

And even then he has trouble finding a ``stable relationship'' between foreign purchases of Treasury securities on the one hand, and the direction of U.S. interest rates and the value of the dollar on the other.

``Even if I gave you the next 12 months of numbers (on net purchases), you couldn't tell me where U.S. interest rates or the euro or the yen were going,'' Bianco says. ``There is no relationship.''

Ex-Post Reassurance

That doesn't stop folks from reacting to two-month old TIC data. Reduced foreign buying is considered bad news for the U.S. dollar and interest rates. It's interpreted as a potential sign of trouble financing the current-account deficit, as if foreign securities purchases are more desirable than foreign direct investment in, say, an auto plant.

The news is ancient history by the time it's reported. We learned on May 15, for example, that the U.S. miraculously managed to attract enough dollars to finance its $64 billion trade deficit in March!

And as to the idea that foreign purchases somehow predict or influence the direction of domestic U.S. interest rates, Bianco says the conventional wisdom is just not correct.

``Historically, the market performs worse when foreigners are aggressively buying and better when they are selling or buying less,'' he says.

If one had to attach a reason to the observation, it might be ``asymmetric information,'' says Neal Soss, chief economist at Credit Suisse.

Dollar Diversification

``The analogy is insider buying and selling in the stock market,'' he says. ``If the directors and officers of a company are selling, the thinking is, they must know more than the average Joe.''

If foreigners as a group are selling Treasuries, domestic investors must be net buyers. And it's domestic investors that have a competitive edge, or asymmetric information, when it comes to their own country.

The latest bout of flu-like symptoms was triggered by news earlier this year that the People's Bank of China was setting up an investment vehicle to diversify its $1.2 trillion of dollars. (Many of China's statistics need to be taken with a large grain of MSG.)

As of March 2007, China's central bank owned $420 billion of U.S. Treasuries. $1.2 trillion - $420 billion = $780 billion that is invested somewhere else. Because its own currency, the yuan, isn't freely traded, Chinese exporters exchange their dollars for yuan at the PBOC. The bank, in turn, looks for a place to park those dollars, which has traditionally been U.S. Treasuries.

Real-World Example

Last month, China announced it was investing $3 billion of its dollar reserves in Blackstone Group LP, manager of the second-largest buyout fund, to boost its returns. What if China were to shoot itself in the foot and dump its entire Treasury portfolio in one fell swoop?

It just so happens we have a real-world example of what it would mean, according to Bianco. The Bank of Japan bought $244 billion of Treasuries in the 12 months ended August 2004. During that time, U.S. long-term interest rates rose and the dollar fell versus the yen.

By April 2006, the BOJ was a net seller of U.S. Treasuries (on a 12-month basis) to the tune of $26 billion, a swing of $270 billion. U.S. interest rates fell during that period while the dollar rose.

``The BOJ bought a quarter-trillion dollars of Treasuries and then abruptly stopped and no one noticed,'' Bianco says.

Never let the evidence stand in the way of a popular obsession.

(Caroline Baum, author of ``Just What I Said,'' is a columnist for Bloomberg News. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

Last Updated: June 4, 2007 00:15 EDT