Foreign Buying of U.S. Portfolio Assets Gains on Asia Demand

Photographer: Brent Lewin/Bloomberg

China traded barbs with the U.S. and Japan over its newly announced air defense zone in the East China Sea, as tensions escalated between Asia’s largest economies and risked damaging a resurgence in trade. Close

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Photographer: Brent Lewin/Bloomberg

China traded barbs with the U.S. and Japan over its newly announced air defense zone in the East China Sea, as tensions escalated between Asia’s largest economies and risked damaging a resurgence in trade.

International investors were net buyers of U.S. long-term portfolio assets in September as demand strengthened from China and Japan, the two largest foreign holders of Treasuries.

The net long-term portfolio investment inflow was $25.5 billion after a revised $9.8 billion outflow in August, the Treasury Department said in a statement today in Washington. China raised its holdings of U.S. government debt by 2 percent and Japan boosted its by 2.5 percent, the department said.

The data cover the month in which the Federal Reserve decided against cutting back its bond purchases at a Sept. 17-18 meeting. The Fed buys $85 billion of Treasuries and mortgage-backed securities each month to keep downward pressure on borrowing costs. Officials will decide to pare purchases to $70 billion a month at their March 18-19 meeting, according to the median of economist estimates in a Bloomberg survey on Nov. 8.

“The market was expecting a taper so it was caught offsides,” said Gennadiy Goldberg, a U.S. strategist at TD Securities USA LLC in New York. “So the second half of the month would’ve seen strong buying in both equities and Treasuries. There was a pretty significant change in positioning at that point.”

Today’s report showed China’s holdings swelled $25.7 billion to $1.29 trillion in September. Japan increased its share by $29 billion to $1.18 trillion, the figures showed.

The Treasury’s monthly report on the cross-border flow of portfolio assets captures foreign buying and selling of U.S. securities as well as American investors’ transactions abroad. It also tracks holdings of Treasuries by countries.

September Outflow

The total cross-border outflow in September, including short-term securities such as Treasury bills and stock swaps, was $106.8 billion in September, the highest since February 2009, compared with a revised net outflow of $13.8 billion the previous month, the report showed today.

Investors probably were cutting risk by reducing holdings of short-dated U.S. debt before the 16-day government shutdown that started Oct. 1, Goldberg said. “Yields on short-dated U.S. securities rose sharply ahead of the shutdown as liquidity dried up, making the strong September outflow consistent with market trends,” Goldberg said in an e-mailed note after the report.

Foreign investors, both official and private, were net buyers of $27.8 billion of Treasury notes and bonds in September after net sales of $10.8 billion the previous month, the report showed.

Stock Purchases

Investors were net buyers of $12.5 billion of equities in September after net selling of $16.9 billion in August, the report showed.

Investors were net buyers of $7.2 billion of corporate debt in September after net buying of $2.4 billion the previous month, the report showed.

The Standard & Poor’s 500 Index (SPX) gained 3 percent in September. Investors in Treasuries gained 0.9 percent that month, according to Bloomberg World Bond Indexes. The Bloomberg U.S. Dollar Index, a gauge of the greenback’s value against 10 major currencies weighted by liquidity and trade flows, lost 2.2 percent in September.

A 26 percent rally in the S&P 500 this year puts it on pace for the best annual gain in a decade and made shares more expensive, with the equity benchmark trading at 16.9 times reported earnings, compared with about 14.2 in January.

Shrinking Deficit

The U.S. budget deficit has narrowed, to $91.6 billion in October, compared with a shortfall of $120 billion a year earlier. The Treasury said last month the shortfall in the 12 months ended Sept. 30 was 4.1 percent of gross domestic product, and the Congressional Budget Office has projected that the deficit as a share of GDP will decline to 3.3 percent this fiscal year and 2.1 percent in 2015.

U.S. Treasury Secretary Jacob J. Lew visited five Asian nations last week, including China and Japan, the two largest foreign holders of Treasuries. Lew pushed for completion of the Trans-Pacific Partnership trade pact by year end.

The future of the Chinese economy will depend on the “character and the pace” of changes discussed by the Communist Party last week, Lew said Nov. 15 in Beijing. Earlier in the week he told broadcaster NHK that Japan had “more work to do” on changes to its economy and reiterated his view that growth there must be fueled by “consumer-led demand, not just exports.”

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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