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U.S. Cross-Border Outflow of Capital Hits Highest Since 2009

A measure of capital flowing in and out of the U.S. showed the biggest net selling since February 2009 as the Federal Reserve prepared to scale back its bond buying, according to Treasury Department data released today.

Investors sold a net $15.4 billion of long-term agency debt in December, the biggest monthly drop in those securities since September 2010 amid selling in Caribbean banking centers often used by hedge funds, the figures showed. They also sold U.S. stocks and corporate bonds, while China and Japan reduced holdings of Treasuries in the month the Fed decided to trim monthly asset purchases to $75 billion from $85 billion.

“You saw corporates and agencies and equities being sold off, and I think that was more a function of the market reaction to the December tapering announcement,” said Gennadiy Goldberg, a U.S. strategist at TD Securities USA LLC in New York. “Markets would have been de-risking in anticipation of higher interest rates.”

The total cross-border outflow in December, including short-term securities such as Treasury bills and stock swaps, was $119.6 billion, after a revised outflow of $13 billion in November, the data showed. Foreign net sales of long-term securities totaled $45.9 billion, after selling of $28 billion in November, the figures showed.

China reduced its holdings of Treasuries by $47.8 billion, or 3.6 percent, to $1.27 trillion in December from a record the previous month, according to the report. Japan’s holdings of Treasuries dropped by $3.9 billion to $1.18 trillion.

Investors might have sold some stocks to take profits after the Standard & Poor’s 500 Index (SPX) gained about 30 percent last year, Goldberg said.

Investors in Treasuries lost 1.1 percent in December, according to Bloomberg World Bond (BUSY) 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 0.1 percent in December.

To contact the reporter on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net

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

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