By Ian Katz – Oct 18, 2011 7:07 PM GMT+0100
Global demand for U.S. stocks, bonds and other financial assets in August was greater than forecast as financial-market turmoil following the downgrade of U.S. debt by Standard & Poor’s boosted demand for Treasuries.
Net buying of long-term equities, notes and bonds totaled $57.9 billion, the highest since December 2010, compared with net buying of $9.1 billion in July, the Treasury Department said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $89.6 billion, compared with net sales of $52.4 billion the previous month.
Investors sought the safety of Treasuries as global stocks declined following the decision by S&P to cut the top rating on U.S. debt for the first time on Aug. 5. Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings on Aug. 2, the day President Barack Obama signed a bill ending an impasse with lawmakers over raising the nation’s debt ceiling.
“The flows into Treasuries really prove that, despite S&P’s ratings downgrade, the dollar and Treasuries remain the global safe-haven asset of choice,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.
Instead of eroding the value of U.S. government debt, the rating cut sparked financial-market turmoil that made Treasuries and the world’s reserve currency favorites among investors, with 10-year note yields dropping to a record low 1.97 percent on Aug. 18. The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners, rose 0.3 percent to 74.147 in August, ending a two-month slide.
Europe Debt Crisis
Slowing U.S. growth and Europe’s debt crisis also drove investors into the world’s biggest and most-liquid debt market in August. Treasuries returned 2.8 percent, while the global bond market gained 1.99 percent, according to Bank of America Merrill Lynch index data. The MSCI All-Country World Index of stocks fell 7 percent, the biggest slump since May 2010, and the Standard & Poor’s GSCI Total Return Index of commodities lost 1.8 percent.
The yield on the 10-year Treasury note fell to 2.12 percent at 12:46 p.m. in New York from 2.16 percent late yesterday.
Economists in a Bloomberg News survey projected long-term financial assets would show net selling of $20 billion in August, according to the median estimate. Four economists participated.
‘No Imminent Demise’
The data show that “there is no imminent demise of the U.S. dollar” and are a reminder that the dollar “still has some attractiveness despite the negatives that are still out there,” said Joseph Lupton, global economist for JPMorgan Chase & Co. in New York.
The data capture international purchases of government notes and bonds, stocks, corporate debt and other securities.
Purchases of Treasury bonds and notes by the private sector totaled $69.7 billion, while official foreign institutions sold $9.6 billion.
“The big surprise was that there was such large private buying” even as “the markets in August were going haywire,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC.
Total net foreign purchases of Treasury notes and bonds came to $88.2 billion in August, compared with net sales of $16.5 billion in July.
“The simple fact that inflows were as large as they were was surprising,” LeBas said. The trend was more toward buying of Treasury bills rather than long-term instruments, he said.
“As T-bills tend to be a substitute for cash holdings, the increase likely reflects global investors’ interest in staying liquid,” LeBas said.
China remained the biggest foreign holder of U.S. Treasuries in August after its holdings fell by $36.5 billion to $1.137 trillion. Hong Kong, counted separately from China, decreased holdings by $4 billion to $107.9 billion.
Japan, the second-largest holder, increased its holdings in August by $21.8 billion to $936.6 billion.
The biggest increase was from the United Kingdom, the third-biggest holder; followed by Switzerland, the Caribbean and Japan. China and Thailand were the biggest net sellers.