Foreign Investors Dump U.S. Assets

Posted In: China, Credit, Debt, Financial Markets, Foreign Investors, Japan, Treasuries

In the midst of the credit market upheaval, overseas private investors sold a record amount of U.S. securities in August. According to the U.S. Treasury Department on Tuesday, the total holdings of equities, notes, and bonds fell a net $69.3 billion, after an increase of $19.5 billion in July. The outflow from U.S. assets was a record high and the first since the financial market crisis back in 1998. The previous record decline of $21.2 billion took place in March 1990.

The monthly net Treasury International Capital System (TIC) flows, which include non-market flows, short-term securities, and changes in banks’ dollar holdings, revealed an outflow of $163 billion in August, compared with an inflow of $94.3 billion in the prior month. Private investors overseas led the outflows, selling a net $141.9 billion in U.S. assets in August.

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According to the Wall Street Journal yesterday, official holdings are of greater importance to the foreign-exchange market, given their massive size. Foreign official holdings in Treasuries fell by a net $29.7 billion. The Journal noted that the TIC data “gave no indication that central banks are shunning the greenback in any significant fashion.” Yet, the two largest holders of U.S. Treasury securities reduced their holdings in August. Japan, the largest holder of U.S. government debt, decreased its holdings by $24.8 billion (4%). China, the second-largest holder of Treasuries, lowered its holdings by $8.8 billion (2.2%).

The sell-off of U.S. assets came at a time when China, South Korea, and Qatar joined Singapore and Norway in setting up sovereign wealth funds to invest excess foreign exchange reserves from export revenue to improve returns. Robert Rennie, chief currency strategist at Westpac Banking in Sydney, told Bloomberg yesterday that, “Asian central banks are becoming more conscious of increasing returns. We’re seeing moves to create sovereign wealth funds, which by definition suggest a structural shift away from Treasuries.”

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