Global Demand for U.S. Financial Assets Cooled in October

Global demand for U.S. financial assets cooled in October amid optimism Europe would resolve its debt crisis, expectations that that have since diminished.

Net buying of long-term equities, notes and bonds totaled $4.8 billion during the month compared with net purchases of $68.3 billion in September, Treasury Department data showed today in Washington. Including short-term securities such as stock swaps, foreigners sold a net $48.8 billion compared with net buying of $65 billion the previous month.

Demand for U.S. debt fell “as economic data improved and European leaders seemed to be getting a grip on the debt crisis” in October, Jay Bryson, global economist for Wells Fargo Securities, said in a note today. The European rescue fund was boosted to 1 trillion euros ($1.4 trillion) in October and investors agreed to a voluntary writedown of 50 percent on Greek debt.

A worldwide Bloomberg poll conducted Dec. 5-6 showed rising confidence in U.S. leadership among investors, who have sought safety in the U.S. from Europe’s sovereign debt crisis even after Standard & Poor’s lowered its credit rating on Treasury debt in August. U.S. government debt rallied the most since the end of 2008 during the third quarter after the unprecedented rating cut.

‘Dominant Trend’

“Many foreign countries like China continue to run big trade surpluses with the U.S. and they will park the dollar proceeds from trade in Treasuries,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Foreign central banks have only sold Treasuries in a handful of months the last several years, and the dominant trend is to build foreign-exchange reserves and add to the Treasuries holdings.”

Investors, primarily foreign central banks, reduced their holdings of long-term U.S. securities by $7.5 billion and sold $9.4 billion of Treasuries, Bryson said. Foreign holdings of U.S. short-term securities also fell by $41 billion.

Economists had forecast net buying of $62.5 billion of long-term assets, the median of four estimates in a Bloomberg News survey. Their estimates before the report ranged from a net buying of $32 billion in long-term assets to $75 billion.

The $4.8 billion increase in net buying of long-term equities, notes and bonds was the lowest rise since June. Drew Matus, a senior U.S. economist at UBS Securities LLC in Stamford, Connecticut, said the figure for July was also weak while August and September were at normal levels.

Possible New Pattern

It “may just be a new pattern or may get revised away,” he said. A reduction in the U.S. trade deficit “suggests these flows should get smaller as the current account is the inverse of the capital account.”

Congressional inaction on cutting the budget deficit led to the loss of the country’s last stable outlook from the three biggest credit-ranking companies. Fitch Ratings lowered its rating to negative on Nov. 29. Fitch said its outlook on the U.S., which it still assigns its top AAA grade, reflects “declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path will be forthcoming.”

In November, a congressional panel of Republicans and Democrats, the so-called supercommittee, failed to agree on $1.2 trillion in government budget cuts before the end of the year.

China Holdings

China remained the biggest foreign holder of U.S. Treasuries in October after its holdings fell by $14.2 billion to $1.13 trillion. Hong Kong, counted separately from China, increased its holdings by $1.7 billion to $110.7 billion.

Japan, the second-largest holder, increased its holdings in October by $22.2 billion to $979 billion. The U.K., a major banking center for Asian investors, reduced its holdings by $13.2 billion to $408.4 billion.

“It looks like foreigners were aggressive sellers of corporate bonds and foreign central banks were moderate sellers of Treasury notes and bonds in October,” said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.

“What’s particularly interesting, however, is who was selling: Switzerland, China, and the U.K.,” he said. Switzerland “was likely selling U.S. assets as part of their currency intervention plans.”

Confidence in the U.S. remains intact even with the swings in financial markets and sentiment.

The U.S. received its highest rating among global investors in more than two years, according to the Bloomberg Global Poll this month of 1,097 investors.

In the fiscal year ended Sept. 30, the government reported the second-highest annual deficit on record, $1.3 trillion.

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