Introduction
It's my long-established practice to publish an analysis each quarter of US financial assets purchased and held by foreign investors. The primary objective of the exercise is to keep a close eye on the vulnerability our markets would have to any serious decline in these flows. Or, the added vulnerability our markets would face if there was net liquidation by foreign investors of their US financial assets.
My analyses are timed to the Federal Reserve's release of its quarterly flow-of-funds data. Although the next release will not be out until the second week of December, I believe the recent slide in the dollar's exchange-rate value makes it advisable to revisit the Fed's most recent numbers, published in mid-September. For the purpose at hand, these are more than adequate.
_____
On 9/16, the Federal Reserve released its latest "Z.1" ("Flow of Funds Accounts of the United States"), with data current through the June 2004 quarter. Although the numbers are subject to revision, the data are more than adequate for big-picture purposes. The Fed is due to release its next "Z.1" on 12/9, which will contain data through the September quarter.
More up-to-date numbers are available for most of the series discussed here. But for my purpose now, presenting the data and accompanying text as they were originally published in September is fine. I simply want readers to reflect on how extraordinarily large the numbers are, as well as on the magnitude and speed of their growth. As it relates to foreign holdings of Treasury and agency obligations, there are some current data later in the missive.
Many investors and analysts remain concerned about the United States' large and growing trade and current-account deficits, and whether foreign investors will continue to fund them in an orderly fashion. This is certainly a concern I have voiced on many occasions, with an accompanying warning that serious weakness in the dollar could significantly exacerbate the situation.
With this in mind, let's look at what our friends abroad were doing with regard to our markets through this year's second quarter. The following material is from missives dated 9/16 and 9/27 ("2Q2004 Flow of Funds -- Foreign Data").
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Some Numbers
NOTE: From the Fed's "Z.1" release with regard to foreign assets and liabilities: "Revisions to the 'rest of the world sector' reflect new estimates of the balance of payments from the Department of Commerce for 1989 through 2003..."
* As of 6/30/04, foreign investors held a total of $8.803 trillion of US financial assets, up about $159 billion from revised holdings of $8.644 trillion as of 3/31. From 6/30/03, the increase was approximately $994 billion. (See Table 1 in the table appendix at the end of the text.)
* As of 6/30, foreign liabilities totaled $4.250 trillion, resulting in a net foreign claim against the US of more than $4.553 trillion. (See Table 1.)
* The dollar's exchange-rate value put in a major bottom in the spring of 1995, commencing a steep rise into early 2002. Note in Table 1 how the expansion in the growth of foreign holdings of US financial assets paralleled the dollar's rise.
* As Table 1 indicates, the United States, for the first time since World War II years, became a net debtor during 1985.
* Table 2 segregates the classes of capital-market assets that are readily salable by foreigners, or where a significant slowing in the rate of accumulation could adversely influence domestic prices. As of 6/30, these totaled $5.957 trillion, or a very healthy 67.6% of total US financial assets held by foreigners. This illustrates the sizable exposure US markets would have to any substantial net reduction in these holdings.
* As of 6/30, foreign investors held the following respective percentages of total outstandings of Treasuries, agencies, US corporate bonds and US equities: 43.1%, 11.6%, 25.2% and 12.3%. Combined holdings of Treasuries and agencies were 24.3% of total outstandings.
By comparison, going back to 12/31/94, not long before the dollar put in the major bottom mentioned above, foreigners held the following respective percentages of total outstandings of Treasuries, agencies, US corporate bonds and US equities: 18.3%, 5.7%, 13.4% and 7.0%. At that time, the combined holdings of Treasuries and agencies were 13.4% of total outstandings.
* As of 6/30, the 15 largest foreign holders of US Treasury debt had total holdings of $1.519 trillion, an increase of more than $91 billion or 6.4% from 3/31. (See Table 3.)
NOTE: The following text was written on 11/27.
Tables 1 through 3 in the appendix break out foreign holdings of US financial assets as of the end of given periods. These are dollar values outstanding at the end of those periods. On the other hand, Table 4 breaks out the net foreign flows into the markets during the periods shown. Figures for 2004's second quarter are at annual rates, which makes them comparable to the data for 2000 through 2003, inclusive.
* During 2003, a very high 73.6% of US financial-asset acquisition by foreign investors was in highly marketable (therefore, highly "salable") asset classes. This shows not only the positive influence that well over half a trillion dollars had on our domestic markets as the money was going in, but also the opposite effect it could have, were there to be even a sizable decline in the magnitude of the flows. Of course, the situation would likely be a good deal worse, were net liquidations to take place.
* During this year's second quarter, financial-asset acquisition by foreigners rose to an annual rate of an exceptionally large $956.4 billion, and a whopping 81.8% of this was in highly marketable asset classes.
* The following statistics illustrate the degree to which foreign capital flows have supported US markets. During the June quarter, foreigners absorbed the equivalent of 92.1% of all Treasury issuance, 49.7% of all agency issuance, and just under 50% of all corporate bond issuance. Combined foreign purchases of Treasuries and agencies came in at an annual rate of $564.6 billion, which equaled almost 75% of total Treasury and agency issuance during the second quarter.
Data from the Federal Reserve indicate there has been a slowing in the growth of foreign holdings of US Treasury obligations, at least on the part of "Foreign Official and International Accounts." For the 13 weeks ended 11/24, Fed custody holdings for this category rose by $25.3 billion or 2.4%. This was materially slower than growth over the prior 13-week period (ended 8/25), during which Treasury holdings rose by $57.5 billion or 5.9%.
Could it be that this slowdown helped put some of the growing downside pressure on the dollar in evidence over the last several weeks?
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Table Appendix
Table 1.
------------------------------------------
FOREIGNERS' U.S. FINANCIAL
ASSETS/LIABILITIES
(Billions of Dollars, Latest Data
Released 09/16/04 Through 06/30/04)
------------------------------------------
Total Total
Financial Financial
Assets Liabilities Difference
------------------------------------------
2004
06/30 8803.3 4249.8 4553.5
03/31 8644.4 4159.6 4484.8
----------------------------------------
As of
12/31
-----
2003 8228.7 4064.5 4164.2
2002 7441.1 3981.8 3459.3
2001 6965.8 3650.1 3315.7
2000 6584.9 3490.2 3094.7
=======================================
1990 1998.4 1388.8 609.6
---------------------------------------
1985 967.4 869.7 +97.7
1984 805.3 841.6 -36.3
---------------------------------------
1980 494.2 666.4 -172.2
1970 104.8 140.5 -35.7
1960 38.9 63.5 -24.6
1950 17.4 31.4 -14.0
=======================================
1945 16.3 14.9 1.4
-----------------------------------------
Source: "Flow of Funds Accounts
of the United States" (Federal
Reserve "Z.1" release).
-----------------------------------------
Table 2.
-----------------------------------------------
FOREIGN HOLDINGS OF US FINANCIAL ASSETS
AS OF 06/30/04 (Billions of Dollars
-- Latest Data Released 09/16/04)
-----------------------------------------------
% of
Total
Total US Financial Assets -----
Held by Foreign Investors 8803.3 100.0
===============================================
Credit-Market Instruments# 4245.9 48.2
------ ----
Open Market Paper 115.5
US Govt. Securities 2524.4
Treasury 1805.1
Agency 719.3
US Corporate Bonds 1606.0
-----------------------------------------------
US Corporate Equities 1710.8 19.4
------ ----
Credit-Market Instr.
+ Corp. Equities 5956.7 67.6
====== ====
-----------------------------------------------
Detail of US Government Securities
-----------------------------------------------
Treasury 1805.1
Official 1130.9
Private 674.2
Agency 719.3
Official 199.1
Private 520.2
------
2524.4
======
-----------------------------------------------
Source: "Flow of Funds Accounts of the United
States" (Federal Reserve "Z.1" release.) #For
the purpose of this analysis, the category
"Loans to US Corporate Business" has been ex-
cluded. As of 6/30/04, this category had tot-
al outstandings of $120.6 billion.
-----------------------------------------------
Table 3.
----------------------------------------
15 LARGEST FOREIGN HOLDERS OF U.S.
TREASURY DEBT AS OF 06/30/04, VS. THE
SAME COUNTRIES' HOLDINGS AS OF 03/31/04
(Amounts in Billions of $s)*
----------------------------------------
06/30 03/31
Country 2004 2004
----------------------------------------
( 1) Japan 689.3 646.3
( 2) Mainland China 164.9 157.3
( 3) United Kingdom 126.5 122.7
( 4) Caribbean Bank-
ing Centers@ 85.8 67.4
( 5) Korea 60.5 60.4
( 6) Taiwan 57.7 54.8
( 7) Hong Kong 52.4 50.7
( 8) Switzerland 49.6 48.6
( 9) Germany 47.7 45.7
(10) OPEC 43.7 43.0
(11) Mexico 38.6 28.9
(12) Canada 30.6 30.7
(13) Singapore 27.0 26.7
(14) Luxembourg 26.4 27.8
(15) Israel 17.9 16.4
----------------------------------------
Total 1518.6 1427.4
----------------------------------------
*Estimated end-of-period foreign
holdings of US Treasury marketable
and nonmarketable bills, bonds and
notes based on Treasury Foreign
Portfolio Investment Survey bench-
marks and on monthly data reported
under the Treasury International
Capital (TIC) reporting system.
Totals comprise both official and
private holdings. Data subject to
revision. @Includes Bahamas, Ber-
muda, Cayman Islands, Netherlands
Antilles, and Panama.
----------------------------------------
Table 4.
----------------------------------------------------
NET ACQUISITION OF U.S. FINANCIAL ASSETS
BY FOREIGN INVESTORS -- 2000 TO 6/30/04*
(Billions of Dollar)
----------------------------------------------------
Years Ended December 31
--------------------------
2000 2001 2002 2003 2Q04*
----- ----- ----- ----- -----
Net Acquisition
of Finan. Assets 963.0 657.7 741.3 783.0 956.4
================= ===== ===== ===== ===== =====
Credit-Market
Instruments
----------------
Open-Mkt. Paper 4.3 -2.6 10.3 9.9 6.3
Treasury Sec. -70.5 10.5 138.9 285.1 413.1
Agency Sec. 141.9 103.7 112.5 11.5 151.5
Corp. Bonds 168.4 195.4 151.0 232.6 213.3
----- ----- ----- ----- -----
Subtotal 244.1 305.4 412.7 539.1 773.6
----- ----- ----- ----- -----
Corp. Equities 193.6 121.5 54.2 36.9 8.7
----- ----- ----- ----- -----
Total 437.7 426.9 466.9 576.0 782.3
===== ===== ===== ===== =====
Above/Net Acquis. 45.5% 64.9% 63.0% 73.6% 81.8%
----- ----- ----- ----- -----
MEMO ITEM#
----------------
Loans to Corp-
orate Business -2.2 -1.6 10.1 -0.8 -10.6
----------------------------------------------------
DISTRIBUTION OF TREASURY/AGENCY ACQUISITIONS
----------------------------------------------------
Treasury Securities
----------------------------------------------------
Official -5.2 33.7 60.5 169.7 252.1
Private -65.3 -23.2 78.5 115.4 161.0
---- ---- ----- ----- -----
Total -70.5 10.5 139.0 285.1 413.1
----------------------------------------------------
Agency Securities
----------------------------------------------------
Official 40.9 20.9 28.6 24.9 11.1
Private 101.0 82.8 83.9 -13.4 140.5
----- ----- ----- ----- -----
Total 141.9 103.7 112.5 11.5 151.6
----------------------------------------------------
*Source: "Flow of Funds Accounts of the United
States" (Federal Reserve "Z.1" release). #Al-
though "Loans to Corporate Business" are classi-
fied by the Fed as "Capital Market Instruments,"
they have been excluded for the purpose of this
examination, since they lack the liquidity of
the other categories. 2Q04 figures are at
seasonally adjusted annual rate.
----------------------------------------------------
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