July 16 (Bloomberg) -- International demand for long-term U.S. financial assets weakened in May as investors sold the most Treasury notes and bonds in six months.

Total net sales of long-term equities, notes and bonds were $19.8 billion in May, compared with net purchases of $11.5 billion a month earlier, the Treasury said today in Washington. Net selling of government notes and bonds totaled $22.6 billion, the most since sales of $25.8 billion in November, after net buying of $42 billion in April.

As investors abroad dumped long-term Treasuries, purchases of U.S. stocks in May were the strongest pace since January 2008. The Obama administration is selling a record amount of government debt to finance a budget deficit that’s projected to approach $2 trillion this year, raising concern about American fiscal policy and spurring purchases of shorter-term U.S. debt.

“There is great worry regarding overseas holdings of U.S. Treasuries,” said Dan Greenhaus, an analyst at Miller Tabak & Co. in New York, in a report to investors after the report was released.

Total monthly foreign investment flows dropped $66.6 billion in May, compared with a decline of $38 billion in April.

The report showed $21.8 billion in net sales by foreign governments of Treasury notes and bonds in May, while the same group of official investors purchased Treasury bills totaling a net $55.6 billion. Bills have maturities of a year or less.

China’s Buying

China, the biggest foreign holder of U.S. Treasuries, increased its holdings of government notes and bonds by $38 billion to $801.5 billion. Holdings in Hong Kong also increased. Japan, the second-biggest international investor, reduced its total by $8.7 billion to $677.2 billion. Russia’s holdings fell $12.5 billion to $124.5 billion. Holdings at Caribbean banking centers also fell, declining by $9.9 billion to $194.8 billion.

Analysts had anticipated international net purchases of long-term U.S. assets of $16.5 billion, according to the median of five estimates in a Bloomberg News survey.

Net purchases of American equities rose $16.7 billion in May after rising $4.6 billion the prior month. The Standard & Poor’s 500 Index jumped 5.3 percent in May, the third straight month of increases.

The Treasury’s reporting on long-term securities captures international purchases of government notes and bonds, stocks, corporate debt and securities issued by U.S. agencies such as Fannie Mae and Freddie Mac, which buy home mortgages.

Agency Debt

Foreign investments in U.S. agency debt increased by $12.8 billion in May, after net selling in six of the prior seven months. Holdings of corporate bonds increased a net $935 million, today’s report showed.

The U.S. budget deficit topped $1 trillion for the first nine months of the fiscal year and broke a monthly record for June as the recession subtracted from revenue and the government spent to rejuvenate the economy.

The shortfall for the fiscal year that began Oct. 1 totaled $1.1 trillion, the first time that the gap for the period surpassed $1 trillion, Treasury figures showed July 13 in Washington. The excess of spending over revenue for June was $94.3 billion, the first deficit for that month since 1991, according to data compiled by Bloomberg.

For the fiscal year that ends Sept. 30, the Office of Management and Budget forecasts the deficit to reach a record $1.841 trillion, more than four times the previous fiscal year’s $459 billion shortfall.

U.S. Debt Sales

Chinese Premier Wen Jiabao expressed concerned earlier this year that his country’s Treasury holdings may fall in value as the U.S. sells record amounts of debt to fund the budget gap.

President Barack Obama is counting on nations such as China to fund his $787 billion economic stimulus and separate programs to aid financial firms and homeowners amid the worst downturn since World War II, which has cost about 6.5 million jobs.

Treasury Secretary Timothy Geithner has sought to reassure investors such as China that their investments in Treasuries are safe, while also seeking to reassure U.S. voters that the government has a plan to get its debt under control.

Geithner, at the end of a trip this week to the Middle East and Europe, said the Obama administration favors a strong dollar and expressed confidence it will stay the world’s main reserve currency.

Dollar Policy

“We support a strong dollar,” Geithner said in an Internet chat with Les Echos newspaper in Paris. “The dollar will remain the principal reserve currency. The dollar’s role in the international financial system places special responsibilities on the United States, to sustain confidence in our financial system, to bring our fiscal deficits down when recovery is in place, and to preserve the Fed’s strong record of price stability.”

Meanwhile, a People’s Bank of China economist wrote in the China Securities Journal yesterday that China should “moderately” increase its holdings of U.S. Treasuries and purchases this year should not be lower than the total for 2008.

The holdings can be trimmed and purchases of other types of U.S. assets stepped up once the American economy recovers, Wang Yong, a professor at the central bank’s Zhengzhou-based training school, wrote in an article in the Xinhua News Agency-affiliated newspaper.

China and other nations with large dollar reserves should hold negotiations with the U.S. government on how those funds can be injected into the world’s largest economy, and those talks should include the possibility of shifting bond holdings into other assets such as stocks and gold, Wang wrote.

Russian President Dmitry Medvedev who first questioned the dollar’s future last month, saying it isn’t “in a spectacular position, let’s be frank, and its prospects cause various questions,” handed out coins at the July 10 G-8 meeting in Italy bearing the words “united future world currency.”

To contact the reporters on this story: Vincent Del Giudice in Washington at vdelgiudice@bloomberg.net

Last Updated: July 16, 2009 11:27 EDT